appraisals

Appraisers don’t use race when valuing homes

June 22, 2019 By Ryan Lundquist 48 Comments

Last week in a congressional hearing on the future of the appraisal profession, some research was used to suggest appraisers are showing racial bias and essentially undervaluing black neighborhoods. I was not expecting the conversation to go that way during the hearing and I’ll admit I’m deeply concerned about the emerging narrative of appraisers being racists.

I know race is a polarizing topic, but I wanted to approach this today with humility to clarify a few things. Please join me in respectful conversation.

THREE THINGS:

1) Appraisers don’t use race: Appraisers cannot and do not use race as a factor when coming up with a value. This is 100% off limits – not to mention highly unethical and immoral. Race has absolutely nothing to do with value. Comps are never selected based on race or racial boundaries of any kind. Let me say that again. Race is NEVER considered during a valuation.

2) Have appraisers “devalued” neighborhoods by $48,000? In the congressional hearing a panelist talked about a study that shows black neighborhoods are devalued by $48,000 compared to otherwise similar white neighborhoods. That’s alarming and society needs to have some serious discussion about this, but this study has NOTHING to do with appraisers actually devaluing properties (read it here). When we hear the word “devaluation” it sounds like we’re talking about something appraisers are doing, but the $48,000 price disparity comes from the author studying price trends from Zillow rather than analyzing the actions of appraisers. In other words, appraisers are NOT devaluing homes by $48,000. Yet when congress members heard “devaluation” and the speaker saying appraisers are part of the problem, the impression is that appraisers are clearly showing bias by devaluing properties based on race. This impression has certainly been passed on via social media too. You can watch the hearing here.

3) Appraisers reflect the market: One of my takeaways from the hearing is there’s a deep misunderstanding of what appraisers actually do, which is why it’s easy to place blame for this $48,000 price disparity on appraisers.

a) Not magicians: Appraisers aren’t magicians able to cause value to rise or fall. We certainly don’t have the power to make prices $48,000 higher or lower in one neighborhood compared to another.

b) The only role: An appraiser’s only role is to ensure the value of a home is measured accurately without bias. What would buyers reasonably pay for a specific home in a specific location? That’s always the question, and the best reflection of value is likely going to come from competitive sales in the neighborhood itself.

c) Locations aren’t the same: The market isn’t doing the same thing everywhere and buyers are not willing to pay the same prices everywhere either. This is why the appraised value can vary so widely – even if homes are identical in different neighborhoods. The speaker’s $48,000 price disparity between black and white neighborhoods is truly shocking, but frankly that’s not an appraisal issue. The appraiser’s job isn’t to ensure values are the same everywhere. Appraisers use neighborhood sales data to come up with value and it would be unethical to borrow “comps” from a higher-priced area to jack up prices in a lower-priced community (or vice versa).

d) Helping is not an option: Even if appraisers wanted to see certain areas emerge in glory after the ugly reality of redlining, it’s still not an appraiser’s professional role to make that happen. This might sound callous, but appraisers don’t make markets move. They only measure the market rather than act as a gas pedal or brake pedal for prices. This is exactly why the $48,000 example is so flawed. This price difference isn’t caused by appraisers doing their job. There are much bigger issues at the root.

As an appraiser I will NOT:

– Show bias against race
– Value a property any differently because of race
– Discuss race in any appraisal report
– Work with people who are known racists
– Treat any clients differently due to race
– Base any opinions in my appraisal on race
– Tolerate racism in real estate if I’m aware of it
– Use subjective language to say one neighborhood is better or worse

As an appraiser I will:

– Strive to be professional and kind to everyone
– Be unbiased in my approach to value
– Respect owners and renters of all backgrounds
– Let market data tell the story of value
– Have friendships with diverse members in the real estate community
– Say yes to speaking engagements with diverse groups
– Listen when people talk about racism in real estate
– Be open to findings in studies on racial bias in valuation
– Speak up when narratives like this emerge
– Clarify the role of appraisers

Why I wrote this: After watching the hearing last week I was deeply concerned that the neutral role appraisers play is being sorely misunderstood. I’m dismayed too that colleagues are being perceived as racists.

In Closing: We have a systemic problem of racial discrimination in our country and there is an ugly history of racism in real estate too. In fact, here’s a sobering presentation talking about redlining in Sacramento. This is exactly why we need to have conversation about the study showing price differences between black and white neighborhoods. This is real. But before running with the headline that appraisers are “devaluing” neighborhoods by race, let’s hit the pause button. The study quoted doesn’t support this claim. Is racism real though? Of course.

Want to comment? Please know I will not approve any inflammatory or racial comments, so I ask that you choose your words accordingly. Likewise, if you don’t want to work with me because I won’t tolerate racism in my life and business, don’t let the door hit you on the way out.

Questions: What is your reaction to the information above? What did I leave out? What are your concerns about racism in real estate? Let’s chat.

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Dude, my house is worth more now, right? Because of that one thing.

June 19, 2019 By Ryan Lundquist 12 Comments

My house is worth more now, right? Or maybe it’s worth less because of that one thing? I get questions like this all the time, so here’s some thoughts swirling through my mind. Skim the headings or dig in. Anything to add?

Questions I’ve heard recently:

Will prices rise because a nearby restaurant got a Michelin Star?
Did my value go up because of the new arena in Downtown Sacramento?
My house is worth more because Lady Bird was filmed here, right?
Is my house worth more because of that $5M record sale?
Would values decline if a new hotel is constructed 1.5 miles away?
A new Starbucks down the street makes value go up, right?
Will it damage neighborhood values if there’s a cannabis facility nearby?
Will a new gas station impact neighborhood prices?
Will the Golden State Killer’s house affect my value?
Are values going to decline if the school district is taken over by the state?
How will adding a casino nearby affect value?
Will prices go down if that new teaching hospital happens?

Not a dissertation: Many of these questions are truly complex and they could be research papers. At the same time we read some of these and think, “C’mon man, there’s no way that impacts value.”

Quick truth: We can get so trigger-happy about thinking everything makes a difference for value, but that’s just not the case. It’s like when a home owner says, “Yo, I got a new faucet in the bathroom. How much does this add to value?” Probably nothing. The market just isn’t that sensitive.

My Michelin Star poll: I ran a poll on Twitter after getting a fantastic question about whether Sacramento’s first Michelin Star would be a positive for the surrounding residential neighborhood.

This wasn’t a scientific survey, but it’s interesting to hear what people think. I tend to agree with the majority too. My sense is the Michelin Star will give bragging rights to neighbors, but I’m not sure buyers would truly pay more in an entry-level area to be closer to a top-tier restaurant. Keep in mind if this restaurant did begin to help the commercial market thrive, then maybe that could spill over into the residential market. Otherwise let’s not overthink this.

Generally speaking: If something has little impact on an area, it’s probably not going to affect value much. Let’s remember that when making value claims and thinking through issues. But if something persuades or dissuades buyers, then it could be a big deal for the market. In other words, will people buy or rent for more or less because of the thing? This is the type of market-based thinking we need to consider.

The arena: As an example, the new arena in Downtown Sacramento has been a game-changer because it’s drawn people and other businesses into the city. It’s been a catalyst for development in the immediate market. But that doesn’t mean a buyer ten miles away would pay more for a house because of the new arena. I say fat chance.

Lady Bird: Would someone pay more for a house because the movie Lady Bird was filmed in the neighborhood? I’m not saying the answer is NO, but I just haven’t met a buyer yet who said, “I totally paid more because of Greta Gerwig’s cinematic masterpiece.” Objectively speaking, I can only find four listings that mention the movie too, and that may be telling.

Two takeaways:

1) One thing: Let’s be cautious about looking for value under every rock. What I mean is it would be wise to remember not everything we encounter is going to sway buyers to pay more or less.

2) Support: Let’s think critically and be sure to look to data to support our value conclusions. At the end of the day we can make claims about how a certain something impacts the market, but what do stats and data actually show? That’s what matters most.

“Beyond the Bubble” article: I wrote a piece for Comstock’s Magazine this month called Beyond the Bubble. These are things on my mind lately with so much talk about whether we’re in a bubble or not.

Questions: What questions have you been asked lately? Have you seen one type of business or something else impact an entire area? What do you think of any of the questions above? Let’s chat.

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How much is that new roof & AC unit worth?

April 23, 2019 By Ryan Lundquist 23 Comments

“I paid $25,000 for a new roof and AC unit. How much is that worth in an appraisal?” I get questions like this all the time and my answer can be frustrating as I say, “It depends.” Here’s my thought process though and why I can’t just rattle off a quick number. Anything to add?

The full amount: A new roof and AC unit are costly, and sellers often want to pass on the full cost to buyers. The idea is, “Hey, I spent twenty five grand, so the buyer is going to reimburse me.” But cost doesn’t always equal value, and it’s not so common for buyers to pay “dollar for dollar” either.

Boring & bling: A roof and AC unit are definitely important, but they’re sort of boring maintenance items instead of bling. What I mean is buyers don’t tend to visit a property and say, “Oh my gosh, did you see that epic new roof? I’m in love.” Nope, they tend to be more impressed with the latest trendy features instead of the age of the roof or AC unit.

Bare minimum: Buyers expect a working roof and AC unit as a minimum. Lenders definitely expect a roof with a minimum of two years of life also. This is why buyers aren’t always willing to pay big bucks for these features because on some level they simply expect them to be adequate already.

Long-term improvements: A roof and AC unit are going to be an advantage for decades, but a buyer might only be in a house for 10 years. So it probably doesn’t make logical sense to pay for the benefit of the entire lifespan of these items in one instance. In other words, the seller has added marathon improvements, but buyers may not pay that during their sprint to purchase.

Location: An AC unit in Antarctica probably isn’t too valuable, so on some level we have to consider location. On a related note, the higher-end of the price market might react differently compared to the lower end of the market. The truth is buyers in some locations or price points are going to be more informed or picky about certain features. Let’s remember energy efficiency can be a factor here too in light of extra savings.

The comps: At the end of the day we have to look to the market for the answers. I tend to consider all the things above, but I also have to be careful not to impose any of my general thinking on the appraisal. Here’s the key. What have buyers been paying for these features? As we look at comps, what seems to be a reasonable amount that buyers would pay? Let’s study comps to begin to get clues about value.

I know, I didn’t actually answer the question. But that’s not my goal here. My goal is to highlight some important thinking as we try to find the answer.

I hope that was helpful or interesting.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What point stands out to you the most? Anything to add?

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The booming FLAT market & rate addiction

April 11, 2019 By Ryan Lundquist 9 Comments

The market is getting hotter, but it’s also pretty flat. Let’s talk about this as well as low rate addiction. Then for those interested I have a huge local market update.

Two things:

1) Competitive but flat market: The spring market is definitely competitive. Real estate agents are saying it’s “hot” and they’re right because buyers are hungry, sales volume is up, and it’s taking less time to sell. BUT prices also seem a little flat. I know, that sounds crazy since there’s so much competition, but it’s what the stats are showing. Let’s remember it’s possible to have a market with lots of competition while prices are more subdued or sideways. In other words, just because it’s competitive doesn’t mean prices are going nuts.

2) Rate addiction: Lower rates in 2019 have brought buyers back into the market after a big slump in 2018. It just goes to show how sensitive our market is to rate changes. In other words, it seems the market is struggling to move forward in glory without low rates. Sounds healthy, right?

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Spring is feeling fairly normal so far and March was actually a strong month. Let’s talk about this.

THE SHORT VERSION:

Price growth is definitely slowing
Sales volume has slumped for 10 months
Volume was strong in March though
Choose comps wisely
I’m now publishing El Dorado County stats
Most metrics are doing what we’d expect for the spring
This post is long on purpose. Skim or pour a cup of coffee.

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THE LONGER VERSION:

Here’s some of the bigger topics to consider right now.

Slow or flat price growth: The median price in Sacramento last month is actually the same as it was one year ago. It’s been a very long time since we’ve seen that happen. Otherwise most other price metrics in the region are up slightly between 2-3% over the year. This is a very modest change over twelve months and it reminds us price momentum is slowing. In many areas it seems prices are hovering around or lower than they were during the height of summer. But keep in mind this isn’t totally abnormal for the spring either because sometimes the new year immediately picks up right where it left off during the height of summer and other times the stats don’t get back to where they were until about May or so. Thus in some senses we’re still waiting to see how this spring market is going to unfold.

A more normal-ish spring: Overall most metrics look normal for the time of year. Prices ticked up again from the fall lull, it took eight less days to get into contract from last month, and there just isn’t that much on the market right now. Part of having an anemic number of listings is normal because the market doesn’t tend to hit its stride until April, but we’re also seeing the byproduct of buyers devouring listings because of low rates.

Choosing comps today: When a market is showing slower price growth it’s important to be realistic about comps. Sellers often want to get super aggressive, but I have some quick advice. Don’t. Give strong weight to similar properties that are getting into contract, and don’t price like it’s the rapidly increasing market from yesteryear. It’s not. Remember, in some areas you might pull comps and not see much price difference at all from the summer of 2018 or even from the spring of last year. Sellers, please remember you are not guaranteed price growth, so don’t price like you’re entitled to it.

Improving volume, sort of: Sales volume definitely made a rebound last month from the profound dullness we saw these past two quarters, yet it was still down 5.7% in the region from last March. And it’s down 7.2% over the past twelve months. Think about it this way. Being down seven percent doesn’t sound like much, but it means there’s been more than two thousand less sales this year in the Sacramento region compared to last year. It sounds bigger when we think of it that way, right? While volume improved this past month, we’ve still had ten months in a row of lower volume, and that’s the bigger story. Moreover, the first quarter was down 10% in the region compared to last year.

Pendings show us the market: Sales from March tell us more about what the market used to be like in January and February when these homes got into contract. So we have to look to the listings and pendings right now to understand where the current market is really at. As of now pendings look pretty strong, which suggests we’ll have another month of stronger volume in April.

Less offers (but actually more): Multiple offers are down about 12% in the region this year compared to last year, but the number of multiple offers actually increased from February to March. This is exactly what we’d expect to see happen in the spring, so don’t write home over it. But it’s still interesting to see.

Price sensitivity: One out of every two homes are getting multiple offers in Sacramento County, and it’s a reminder buyers need to bring strong offers. But sellers ought to price correctly too. Buyers are not desperate and willing to pay unrealistic prices, so I advise aiming for the market instead of that one mythical buyer who will overpay for some reason.

Waiting: We’re waiting and needing a few more months of data to see how this year is going to unfold. It’ll be most interesting to see if we get a little more price growth too (beyond just rebounding from the dull fall). The verdict is not in yet for this year, and there is still an element of uncertainty because we have a market that feels heavily driven by low rates for the time being.

I could write more, but let’s get visual instead.

BIG ISSUES TO WATCH:

1) SPRING GETTING HOT TECHNICALLY: The market is heating up for 2019. We’re seeing price changes, lower inventory, and increased sales volume. So prices are up from the dull fall, but they’re also flat as you can see under #4.

The median price is actually down in Placer County, but I’d suggest waiting a few months before making a big deal out of that since Placer County doesn’t have many sales each month, so data can be a little more volatile Yet this hasn’t happened in a long time either.

2) SLOWING MOMENTUM: Despite the heating, stats show the market is slowing down when we look at the rate of change by year. Looking at monthly, quarterly, and annual numbers helps give a balanced view of things.

3) SALES VOLUME SLUMP for 10 months: It’s important to look at sales volume in a few ways to get the bigger picture. Here it is by month and year.

SACRAMENTO COUNTY:

Key Stats:

March volume down 4.9%
Volume is down 6.2% over the past 12 months

SACRAMENTO REGION:

Key Stats:

March volume down 5.7%
Volume is down 7.2% over the past 12 months

PLACER COUNTY:

Key Stats:

March volume down 5.5%
Volume is down 7.7% over the past 12 months

EL DORADO COUNTY:

Key Stats:

March volume down 8.9%
Volume is down 9.0% over the past 12 months

4) LAST YEAR VS THIS YEAR: It’s been a LONG time since we’ve seen some metrics almost identical to what they were last year. Can you see why I’m saying prices seem flat lately? This may not be true in every single price range or neighborhood of course, but this shows us price momentum is slowing. With that being said, it’s still okay to say the market is “hot”. It is. But I’d say competition is hotter than price appreciation.

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SACRAMENTO COUNTY (more graphs here):