Rapid price growth. That’s what we’ve been seeing lately in many markets across the country. I’d like to share some stats below for my local market and then talk about whether appraisers are keeping up or not.
RAPID PRICE GROWTH:
The orange line at the top left is the median price these past two months in the Sacramento region. The gap between 2021 and previous years is quite wide, which shows prices have gone up quickly.
SOME CHARTS INSTEAD:
If you’d rather see some numbers instead of line graphs, here’s a quick market recap. Check out that 17% price growth lately. Holy Batman!! I typically share one big market post each month with lots of visuals, but this time I’m only going to talk about prices. I’ll have much more next week and I’ll put some stuff out on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.
RAPID PRICE GROWTH IN NEIGHBORHOODS:
Here are a few local neighborhoods to show how much the market has turned up lately. One of the things I do as an appraiser is calculate price change by following the trendline over time and comparing it to actual sales and pendings in the neighborhood to be sure the trendline is legit. Here’s a video tutorial for how to make a scatter graph like this. See my graphs tab too for other tutorials for gettin’ visual.
Here’s an example where I appraised a unit in a small gated community with VERY few sales, so it wasn’t easy to understand what the market was doing. This is why I looked at the entire zip code in blue and gave strong weight to a couple neighborhood sales that also sold a few years ago too (I connected a line between these sales (green and orange).
ARE APPRAISERS KEEPING UP?
So the question becomes, are appraisers keeping up with the market? I’d say YES and NO. Here are a few things on my mind.
SMOKING PRICING CRACK: Some offers are disconnected from reality, so we SHOULD NOT be seeing appraisals anywhere near the contract price. We have a market where buyers are sometimes making irrational offers.
WORD ON THE STREET: I’m hearing stories of appraisals coming in at or above the contract price and ones that are lower than the contract price. It’s not all one thing, though I think the negative stories get the most attention.
THE JOB: An appraiser’s job is not to “hit the number” or make the deal work. The appraiser’s role is to reflect the market and assess risk for the lender. It’s not about whether the buyer wants the house. It’s about whether the lender should make the loan. Thus an appraisal should be a reflection of what buyers would reasonably pay as opposed to an outlier buyer willing to pay more than anyone.
BRAKES OR GAS: Appraisers are not a brake pedal or a gas pedal for the market. They are more like a mirror to reflect the market. I mention this because at times when rapid appreciation happens, it is what it is. Even if an appraiser is baffled by how much current comps and pendings are up from last year, it’s not the appraiser’s job to hit the brakes by coming in lower. There is no such thing as a market only being able to increase by 1% each month either. Look, if the market is going up quickly, the appraiser needs to adjust up and call it a day while of course supporting all adjustments and conclusions in the report. And to my colleagues, we are NOT number hitters and should NOT be letting the contract price influence us (just in case you think I’m saying that).
SALES vs PENDINGS: It’s essential for appraisers to measure the difference between sales and the current market. Sales are like historical artifacts that tell us what the market used to be like 30-90 days ago when they got into contract whereas pendings are going to be a clue into what buyers are willing to pay in the current market. How has the market changed since the price was established for the comps (more or less the contract date)? That’s exactly what appraisers need to measure and precisely why appraisers need to look at both sales and pendings / listings.
BIG ADJUSTMENTS: At times lately I’ve given some hefty market adjustments. For instance, when appraising a home in Rancho Cordova I used a really similar sale from July that sold at $365,000 and the market was willing to easily pay about $40,000 more today. That’s over 10% growth in a very short time period, but that’s what the trendline showed on my graph (see above). This rapid growth was also very clear when comparing recent sales to older sales and looking at higher pendings.
LONE RANGER PENDINGS: It’s important to not base our perception of value on one “lone ranger” pending sale. So if all the comps are at $500,000 and there is one pending at $575,000, I’m not automatically making a $75,000 adjustment up. What I want to look for is a group of pendings to tell me where the market looks to be going. Thus if I see pendings are $510,000, $512,000, $520,000, and $575,000, I can see the market is increasing and I’m going to have to figure out what my market conditions adjustment needs to be by making graphs and understanding from agents the terms of the pendings. What is the contract price? Is the seller offering any concessions back to the buyer? How many offers were there? And these days, is there an appraisal waiver or removal of the appraisal contingency? In short, there is a story to understand about each pending and sometimes the pending might reflect the market well and other times it might be something to throw out because it’s too high OR too low.
YIKES, NO ADJUSTMENTS: A friend showed me an appraisal on her house from one week ago and the appraiser correctly stated the market was increasing in value. But three out four sales did NOT have any adjustments up to account for the market increasing. I’m not saying appraisers need to always adjust every comp, but I was scratching my head wondering why an upward adjustment was not given since the market absolutely went up in value since these properties got into contract 30-60 days ago. Basically, in this case it looks like the so-called appraised value in early March was more like a reasonable value from mid-January and early February because that’s when the comps got into contract and there were no adjustments up to account for the difference. In short, when stuff like this happens, appraisers are definitively behind the market.
THOUGHTS ON COMPLAINING: On real estate forums lately I often hear agents say stuff like, “Appraisers are a joke. Show me two appraisers and I’ll show you two different values.” I get it. But let’s be real. If I asked two agents to give me a value on a house, how many different values do you think I’d get? The answer is the same. We’d see two values and sometimes the difference would be really wide. I say this respectfully and humbly because value is difficult AND there is no such thing as only one value either. There is always a reasonable range, so it makes sense to see two appraisals not come in at the same level. BUT if they’re too far apart, then clearly someone botched value…. On a side note, it’s easy to fall into the trap of speaking down to other real estate professionals, but let’s raise the bar. There is certainly a place for complaining, but don’t make it a lifestyle or shtick. This goes for the way agents talk about appraisers and the way appraisers talk about agents. Sorry for the sermon, but this is something I believe strongly. You won’t hear me disparage another group because I am a professional. I’d rather listen, educate, elevate, and of course admit when I’m wrong.
OTHER: This post is starting to be a dissertation, so I’ll stop here. What am I missing? What would you like to add? Any helpful nuggets to share?
Questions: What are you seeing happen with appraisals right now? What stands out to you most about the stats above? I’d love to hear your take.