“Market” – A word poorly understood, and often misused.
A gathering or place for buying and selling things. It can be physical, or virtual, and involves at least one third party for competition. Perfect competition is when you have many buyers and sellers. A real property market is seldom or never perfect.
A “market” for houses (Per Investopedia) requires:
- An arena – the marketplace. (Let’s say our local MLS.)
- Buyers and Sellers. (Buyers with capacity and desire to buy, sellers actually desiring to sell.)
- One commodity. (For housing, it must be of a competitive size, location, quality, and such.)
It also requires competition, pricing, and freedom to transact.
For real estate, the best descriptive term is the competitive market segment.
It’s not the “marketplace” – on the MLS and in the agent’s offices. It’s not all the real property in the city (houses, condos, gas stations, public parks and streets, convenience stores, and luxury penthouses). Each property type may — and will — have different ‘conditions’ at different times.
The only way to evaluate/analyze market conditions is to start with a carefully and clearly defined segmentation of buyers who desire the property type.
How does this affect trend analysis and time ‘adjustments’ for appraisers?
- The competitive segment must be cleanly defined.
- The specific ‘for sale’ properties must be identified.
- The probable buyer preferences must be fully specified.
The trend cannot include all the houses in the neighborhood. They are not for sale. Our main data set, our “population” of study can only be specific sales or listings
If we are to do a “market analysis,” that “analysis” must comprise the above three conditions – market conditions!
So what are “conditions”? Conditions include all the defining characteristics and features that influence the patterns of buyer/seller interaction.
Per a web article by “SELL”, there are fourteen types of market conditions! These include: financing, competition, demand, interest rates, purchaser models, effective purchasing power, inventory (listings), price levels, inflation/deflation, employment, ongoing availability, stability/instability, buyer preferences/needs/perceptions, and finally, finally – regulations and taxes!
Whew!
To sum up . . . In order to do market analysis (and time adjustments) as it’s supposed to be done, we must:
- Know what a market is, as a clearly defined CMS© (Competitive Market Segment).
- Use the specific “for sale” properties which would have competed on the date of value.
- Clearly parameterize the property feature/characteristics preferences of our pool of buyers.
If we are to do a relevant time adjustment (price index), it must be based on all of the mentioned 14 types of conditions, not just the “market area” as required by USPAP Rule 1-3. “Area”, (location) is but one of the dimensions required for a legitimate market analysis and trend analysis.
Market definition, market delineation, and market analysis come first. Not “pick some comps.”
February 14, 2024 @ 5:02 am
Really liking the “specific pool of buyers” thought. This is easily missed by much of appraisal education, focused on mean, median, mode, and real world problems with the Principle of Substitution.
Currently, about 1 of 3 homes sells for cash. These buyers can be as outside of the valuation box as they want.
February 14, 2024 @ 5:18 am
This is good. Really good. if only people were read it and truly put it to use. Thanks for this clarification of what runs through my mind as I am putting together a report
February 14, 2024 @ 7:03 am
I was handed a “List of Adjustments” my first day on the job. This List was created by the managers of the appraisal department of a federally insured financial institution.
I questioned the List and asked if it applied in all locations, from Beverly Hills to Watts, in every age range, size range quality range? Is a pool woth the same in Beverly Hills and Watts, etc, etc.
This was met with resistance. I told my manager the List was wrong and disconnected from the market. He asked for an example, I told him them Market was going up 1.5% Per Month and he asked If I could prove it.
I had just left sales to come in to appraisal so I went back to my office and did some Paired Sales, and share them with him. His response was “OK, we will use 3/4% per month.
I was taken back, and responded by saying “Just because you do not like that the market is going up 1.5% per month, does not mean you should deny it. How are you going to hit the sales price, by fudging the other adjustments?”.
In that moment, I knew my upward mobility was squashed.
Our industry has gotten by for decades no doing our job, using Lists, and Auto Adjustments.
An, yet, Time/Market Conditions can be the easiest to provide documentation and support for.
The GSE’s have recently been critical of appraisers Time adjustments, and for good reason. As an industry we have gotten by, now technology has proved we can’t be trusted to actually measure Market Conditions.
There is no structural support for an appraiser who wants to do good work but is not allowed the time in terms of billable hours or the actual time that it takes to provide support for adjustments.
Rather than be a complainer, I choose to move away from the demands, pressures, of doing lender work. We are always at choice. Doing nothing is a choice.