Inside and Outside the Boxes:  Down Cycling

While providing a “snapshot” of the market and economy at the community or regional level is important for the reader to gain perspective of the housing market and factors influencing it, FNMA is asking for neighborhood trends.  Therefore it’s important to understand the difference between a neighborhood and a market area. Simply stated, a neighborhood is a group of complimentary land uses that are influenced by the four forces (social, economic, governmental and environmental) in the same way.  The neighborhood can be comprised of a single subdivision or a grouping of subdivisions that are similar in price range, physical character, profiles of residents, etc. In contrast to the neighborhood, the market area is a collection of neighborhoods that may have similar governmental influences, but often have varying economic and social characteristics.  Since the URAR is “neighborhood specific”, it is important that the neighborhood is clearly defined and that the characteristics, one unit housing trends, land uses, price ranges, etc., are based on the neighborhood and not the “market area”. In a fluctuating market you can get mixed signals at the market area and neighborhood levels. There can be a shortage of entry-level housing (with increasing prices) while higher-priced properties are experiencing declining price points. Clarifying the trends is critical to advising the client of the risks inherent in the neighborhood and the subject property.

Making your points — plotting data

Analyzing sales data over the “short real estate cycle” (SREC - 3 to 6 years) for the neighborhood will give you a good read on neighborhood trends, that can be compared to market area and regional trends.  The key is to clean the data (remove concessions, non-market sales, etc.) and observe shifts in values within the neighborhood. Why go to the trouble? Simple. Trends at the market and neighborhood level represent the collective housing elements (all price ranges) for those areas. In either case, segments of the overall market or neighborhood can be outperforming the collective area. Similarly, properties directly competitive to the subject property can be performing at a rate above or below the overall neighborhood trend.


The appraiser’s analysis of a property must take into consideration all factors that affect value. Because we purchase mortgages in all markets, this is particularly important for market areas that are experiencing significant fluctuations in property values (including sub-markets for particular types of housing within the market area).


Take it to the next level


At any level (regional, market or neighborhood), prices may be increasing, declining or stable.  However, what impact is that having on the subject property?  The chart to the right represents sale price trends of a 1558 square foot home at the neighborhood level, which shows trends over the SREC.  At the subject property level, prices peaked in 2005 and declined slightly in 2006 through early 2007 and have shifted slightly upwards again in late 2007. FNMA isn’t asking just if neighborhood price trends are “stable, increasing or declining”, but rather what impact do they have on the subject property. The graph below, in contrast to analysis in the housing market addendum and trends at the neighborhood level, provides the answers. While Case-Shiller, NAR or OFHRO data may indicate a declining market in the metro area and local data may support similar trends for the neighborhood, you need to communicate the impact on the subject property.

Saying it is so … doesn’t make it so

This brings us to the second question that FNMA wants answered. Can you provide support for your answers to these questions in the Market Conditions section? USPAP Standards Rule 2-1 requires that all written or oral appraisal reports must:

  • Clearly and accurately set forth the appraisal in a manner that will not be misleading;
  • Contain sufficient information to enable the intended users of the appraisal to understand the report properly;

From FNMA:

Appraisers simply can’t guess about “one-unit housing trends” and “market conditions”; they must have a factual basis for their conclusions and communicate that basis and logic to the client either within the URAR or as an attachment.

  • The appraiser’s analysis should go beyond any limitations of the forms, with additional comments and exhibits being used if they are needed to adequately describe the subject property, document the analysis and valuation process, or support the appraiser’s conclusions. The extent of the appraiser’s data collection, analysis, and reporting must be determined by the complexity of the appraisal assignment.
  • We require the appraiser’s comments to be stated in specific, factual terms that are supported by the information included in the appraisal report.

Subject Property Trends

Trend analysis at the market, neighborhood and subject property levels are pieces of the puzzle. Presented within the framework of a brief housing market addendum (with key economic indicators for the market), the reader is provided with a picture of the subject property and its current market environment.

While it may appear to be a lot of extra work, key economic indicators are generally available at the community level from various sources and can be tracked and used for different assignments. The graphs and trend analysis at the neighborhood or subject property level will require a few extra steps, but once you have a familiarity with graphing tools, it’s little more than importing data from the MLS.

Appraising in a fluctuating market increases the complexity of the assignment and requires the appraiser to take additional steps to support and communicate the findings. A brief and well-developed housing market addendum provides the client with answers to key questions and shifts the burden of underwriting the risks associated with the property to the client, where it belongs.