Q&A with Freddie Mac’s SF Chief Appraiser: The Importance of Market Conditions Analysis – In All Markets
In an article from July 2021, Scott Reuter, Single-Family Chief Appraiser, spoke about the unique challenges that fluctuating markets present for appraisers and how proper analysis and accurate reporting of market conditions are vital to ensuring credible property valuations.
At that time, we were seeing a rising trend of appraisals coming in below contract price because of market conditions not yet evidenced in closed sale transactions. Time has passed and the landscape has changed dramatically, with measured Federal Reserve rate hikes increasing mortgage rates and understandably softening home price appreciation. However, one thing remains the same…we’re still seeing appraisals that don’t include an effective analysis of market conditions or necessary adjustments.
With this in mind, Scott answers some questions around why, even as we’re coming out of an environment of extreme upward price pressure, this is still an important topic and practice for appraisers.
Q: You’ve spoken about how analyzing market conditions and making necessary adjustments is an effective way to handle challenges presented by rapidly fluctuating markets. Now that we’re seeing home price growth soften in many markets, does this change the approach for appraisers?
A: Not at all. Whether property values are increasing or decreasing, dramatic changes in market conditions that are not yet evidenced in closed sale transactions demand additional research and analysis. It’s true we’re coming out of an environment of upward pressure on prices in many markets, but appraisers now need to ensure they’re accounting for the softening of price growth and analyzing and measuring any potential stabilization or downward movement and pressure on value as markets and activity soften.
Q: Why is this so important?
A: Proper analysis and accurate reporting of market conditions are vital to ensuring credible property valuations. The Uniform Standards of Professional Appraisal Practice (USPAP) requires a credible opinion to be based on relevant evidence (data) and logic (analysis). Therefore, for appraisers to make a credible opinion of market value, it must be based on a thorough analysis of market conditions.
Additionally, Section 5603.4 of the Freddie Mac Single-Family Seller/Servicer Guide addresses unacceptable appraisal practices. Examples of unacceptable appraisal practices include the use of inordinate adjustments for differences between the subject property and the comparable sales that do not reflect the market’s reaction to such differences, or the failure to make proper adjustments when they are clearly necessary.
Q: What’s the impact if appraisers don’t do this thorough analysis?
A: It means appraisals aren’t accurately reflecting changing market conditions. This can have a ripple effect across the industry – from influencing the accuracy of potential comparables used in subsequent appraisals to impacting the data we use in our collateral risk management oversight.
Q: So, what should appraisers do if they find themselves in a declining market?
A: Whether it’s a declining market or just a softening one, appraisers should take the same approach as in a market with upward pricing pressure. It’s every bit as acceptable – and important – to reflect downward movement of market conditions in the final reconciliation of value. In a declining market, appraisers should consider whether a market conditions adjustment should be applied and whether it’s more appropriate to reconcile near the lower end of the indicated value, rather than near or at a midpoint value indication (regardless of current market trends).
Q: What role do lenders play here?
A: I encourage lenders to carefully review the appraisal reports they receive and to consistently provide feedback to appraisers that reinforces the importance of an accurate market conditions analysis. An accurate market conditions analysis truly is the backbone of an appraisal and, when developed properly, results in an analysis that is consistent and defendable across any level of review.