declining values

What makes real estate values move? I often ask this question when speaking at real estate functions, and it’s interesting to hear the responses. I usually start by showing a photo of Luke Skywalker with the caption, “Luke, use The Force to make value move.” Then I ask, “Is that sort of like what appraisers do? Can they make a market move depending on how they appraise properties?” We all know changes with interest rates, housing inventory, the economy, or cash investors can definitely influence property values. That’s obvious. Yet when asking the question, “Do appraisers make values go up or down?”, there is often a bit of hesitation. What do you think? How would you answer this question if a client asked you?

Do appraisers make the market move or not? There are so many “forces” that impact real estate values. In fact, if you’ve been around this blog long enough, you’ve heard my schtick about how real estate is like a multi-layered cake since there are many “layers” in a market that impact or create value. Check out the cake below to get more fully what I mean (this is an updated image). Yet it’s still easy to think appraisers are the ones making a market move since they are the ones appraising properties at higher levels. Unless there is fraud going on though, the higher appraisals are really a result of the layers of the market having changed. It’s not appraisers pushing the market up, but rather the market moving and appraisers simply interpreting that change. Think about 2012 when the market hit bottom and values began to increase quite rapidly – especially in early 2013. If anything, during this most recent boom, appraisers were accused of appraising properties too low rather than inflating values.

An Example of 1% interest rates: Imagine if interest rates hit 1% tomorrow. What would that do to home prices? First off, the market would be instantly flooded with buyers because of how much more affordable it just became to borrow money. This would create intense competition resulting in a dramatic lowering of inventory, which would inevitably increase prices because of the scarcity of property. In the midst of shifting “layers” of real estate, appraisers would rightly be appraising properties at higher levels since the market is now hands-down willing to pay those prices. But appraisers didn’t actually move values higher, did they? They simply interpreted the market that changed.

Key Takeaways: 

1. There are many forces that impact value in a real estate market.
2. Memorize the cake analogy so you can use it with your clients and speak definitively about what is making value move in your market.
3. Appraisers interpret the market rather than move it. Appraisers are more like a measuring tape than a gas or brake pedal.
4. A market does not need appraisal fraud to see values increase. This idea tends to float around the real estate community, but it’s a misunderstanding of what really drives real estate.

By the way, I’ll post more specifically on Sacramento market trends next week. Be on the lookout for some stellar graphs to use for your newsletters and emails to clients.

NOTE: Appraisal fraud and low appraisals could certainly be a layer in the cake above, but fundamentally appraisers are not drivers, but interpreters. That’s my main point. We could easily talk about fraud or even whether appraisers are doing a good job interpreting the market or not, but that’s another post.

Questions: What else makes real estate values move? Any appraisal stories or insight to share?

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