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Residential realities: Home price growth is slowing, housing inventories are tight, and a market correction is possible--but residential real estate appraisers say the reality is more nuanced because each market is different.

The residential real estate market in the San Francisco Bay Area is "unique," says Denis A. DeSaix, MAI, SRA, principal at Metrocal Appraisal in Livermore, California. "But then, I would guess everyone says that about their own market."

He's right. The residential sector essentially is local, with each market having its own dynamics --from types of industry, to employment levels, to access to mass transit, to cultural scenes. "There are so many local nuances," says Richard S. Larkin, SRA, president of Larkin Appraisals in southeastern Wisconsin. "Am I better on the north side of the freeway or the south side of the freeway? Or is the Jones school system more desirable than the Smith school system?"

There are, however, several macro trends that apply to local markets throughout the United States--and by understanding these, appraisers can gain insight into their own markets and enhance their ability to see where home values might be headed.

Slower growth--for the time being

The market for residential real estate typically tapers off in the winter, but this past one was especially slow. That prompted many to think that after years of increasing home prices, a significant market correction was underway. By February, however, the market was picking up again--but at a slower pace compared with the past few years.

In parts of the Phoenix area, "prices are as high as they were in 2007, before the recession, but the increases have been leveling off," says Dale C. Cooper, MAI, SRA, AI-GRS, AI-RRS, vice president and chief appraiser at Foothills Bank in Chandler, Arizona.

That also appears to be true at the national level. The National Association of Realtors expects the median home price to rise just 3.1 percent this year--significantly lower than the annual double-digit increases some markets have seen in recent years. "Real estate agents tell me they think this slowing is a good thing," says DeSaix. "It lets the market catch up to itself."

At the same time, many of the underlying factors that have driven up prices over the past few years are still in place. Interest rates are relatively low. The stock market remains healthy. And unemployment levels are down.

Above all, demand continues to outstrip supply in many areas. Housing inventory is low, and construction hasn't kept pace with need. According to NAR, housing starts are low compared with historic levels: Just 6 million new units were built over the past decade, while more than 15 million would have been necessary to keep up with population and job growth during those 10 years. That reality has been driving up prices.

Low inventory is something of a self-perpetuating phenomenon. In a tight market, homeowners who want to move typically wait to find their next house before listing their current one for sale. "They're afraid to move--they don't want to run the risk of not being able to find something they like," says Rachel Massey, SRA, AI-RRS, owner of Massey & Associates Valuation in Saline, Michigan. Therefore, their houses stay off the market.

Price pressure has been particularly strong at the lower end of the market. There, the lack of inventory is aggravated by the fact that higher prices for higher-end houses have pushed more people into the lower segment. There also is growing interest in smaller, more energy-efficient homes. As a result, markets tend to be more active on the lower end, and less so on the higher end. The exception, of course, is the very high end, where homebuyers are far less price sensitive, notes Charles B. Baker, SRA, AI-RRS, owner of Appraisal Pros in Pasadena, California. He recently appraised two new spec homes in Southern California at about $80 million apiece.

In Wisconsin, "the market for larger and newer existing McMansions or large executive homes is slow," says Larkin. "People looking at this class of housing usually factor in what their individual remodeling and personalization [cost] is going to be, and that depresses the sale price. The alternative new custom construction also impacts this higher-price segment of the market."

On the other hand, Larkin says, the market for smaller houses is brisk, with people often submitting bids at or above asking price. "Appraisers are complaining that the disconnect between the prices people are willing to pay versus what is supported by recent comparable sales creates a lot of lending headaches," he says.

In Arizona, says Cooper, "I think the lower-price housing below $400,000 (and below $225,000 in smaller and rural markets) will continue to have strong absorption. But everything that's above what the median income can afford, especially the oversupplied $1 million-plus market, is probably going to level off and continue to soften." Very few people, he notes, can afford a multimillion-dollar home.

The picture is much the same around Ann Arbor, Michigan, where the market for lower-priced homes continues to be tight. "The real pressure is on the starter-home market," says Massey. "Lack of inventory is making people overbid on those houses, and that is naturally driving prices up." This situation makes it especially tough for first-time buyers, who typically come to the table with low down payments and, quite often, high levels of student debt.

Reaching the limits?

In much of the nation, high home prices and the resulting affordability problem can slow markets as potential homebuyers pull back or simply get priced out.

"Affordable housing is a core issue in California, especially in the higher-density urban centers," says DeSaix. For several years, home prices in the Bay Area saw annual increases of 15 to 30 percent. In response, people expanded their home search to outlying areas. For example, exceptionally high prices in San Francisco caused people to shift their attention across the bay to Oakland, where they can pay about a third less for housing. Even there, DeSaix says, the median home price is $627,000. On the other end of the spectrum is Silicon Valley, "which is ground zero for affordability issues," he says. "The median price there is $2.1 million, which might get you a 1,900-to 2,300-square-foot home."

The affordability issue has prompted California to pass "the most significant housing legislation that I have seen since rent control," DeSaix says. "It effectively allows single-family residential properties to add an accessory dwelling unit that can be rented out. That's a factor that will be more and more important for appraisers to be able to analyze in the near future." [Read about one appraiser's experience with accessory dwelling units on page 28.]

California is by no means alone in struggling with affordability. The increase in the nation's median home price has outpaced income growth significantly in recent years. The NAR Affordability Index uses a scale of 0 to 200 to rate affordability, with higher scores indicating more affordable markets and lower scores indicating less affordable ones. A score of 100 on the index means an average family can afford an average home in that market. In late 2018, only 11 states had a score above 100.

These realities have prompted many in the profession to wonder whether there is a significant market correction coming soon. Many in the industry see a stable residential real estate market ahead. But "a blip in interest rates or unemployment could cause some pullback," says Baker, who chairs the Appraisal Institute's Residential Appraiser Project Team. However, "I don't see a looming existential threat on the immediate horizon at this time."

"Affordability and general indebtedness of all financial obligations of buyers will affect the market," Cooper says. "But the good news is that this real estate cycle and upswing had verified income and much better underwriting for consumer loans" compared with the run-up to the 2008 housing crisis.

Others suggest that high prices may be reaching the point where something has to give. In Washington, D.C., for example, "the prices in some areas are ridiculous--they don't make any sense," says Donald S. Boucher Sr., SRA, president of Boucher & Boucher in Washington. "There are some areas in the city once considered marginal locations where houses are now selling for more than $1 million. I believe we are poised for a major correction in housing prices."

Boucher also notes the economy is an important consideration. "We have had a good run for nine years," he says. "If you look at past recessions and peaks and valleys with the economy, nine years is pretty long."

Byron E. Miller, SRA, AI-RRS, principal at BM Appraisals in Minneapolis, also cites the economy as a mitigating factor: "On a macro level, there is a lot of uncertainty around the economy." Homebuyers, he says, are likely to be sensitive to any downturn. "For most folks, their home is the largest investment they will ever make, and uncertainty breeds fear," he says. "When there is uncertainty about the economy, people will wonder, am I going to have a job? Should I stay put rather than move?"

The challenge of keeping up

In most markets, appraisers will need to adjust to an environment that is moving fast and becoming increasingly complex. For example, high prices in Washington, D.C., are pushing millennials into neighborhoods once considered marginal. As that happens, they are "expanding the geographic breadth of the market" and requiring appraisers to rethink neighborhood boundaries, says Boucher.

He cites one street in the nation's capital that traditionally served as a clear boundary between a wealthy neighborhood on the west side and poorer one on the east side. "You didn't cross that street for comps," he says. Now, gentrification has changed things so that "it's the other way around, and things on the east side are more valuable than things on the west side," Boucher says. "Standards that used to seem hard and fast are often gone."

What's more, there's a wealth of new energy-efficient building materials and features that affect home values, ranging from Bluetooth-enabled HVAC, home entertainment, lighting and security systems, to solar photovoltaic panels (the latter becoming a requirement on all new homes in California starting next year).

Appraisers need to consider "all these technology changes that improve the owner experience in real estate" when developing an opinion of value, says Cooper.

Technology also greatly increases the availability of data and market statistics available to appraisers. "Appraisers should be heavily invested in significant market analysis--a constant review of market trends such as expired and withdrawn listings, price adjustments, increasing inventories and days on the market," Boucher says.

Massey, who describes herself as "analytical and detail-driven," recommends taking a careful look at the numbers over time. In particular, she says it's important to keep track of the contract-to-listing ratio: When there is a greater percentage of houses on the market that are under contract, the market is more active and faster moving; a lower percentage means a weaker market.

"If I'm looking at a $700,000 house and there are 20 on the market in the area but none are under contract, that house is unlikely to be at the high end of my range, no matter how nice it is, because the ratio is saying it's not active," she explains. "But if there are 10 under contract, I am probably going to put it at the high end of my range because we've got an active market." This ratio provides a kind of leading indicator of where values are likely heading, she says. "Instead of working with what has sold, this helps you see what is happening at the moment."

More informal information gathering can help as well. This means networking with peers and, especially, with real estate agents who can provide insight into how buyers and sellers view the market. Massey says she often spends weekends attending open houses. "Besides giving me a chance to look at comparables, I get to see what market activity is like and talk to the real estate agents," she says.

Overall, says Boucher, "You have to keep up. Appraisers need to be willing to adjust so that we can accurately reflect the market."

Peter Haapaniemi is a freelance writer based in metro Detroit.

Rachel Massey, SRA, AI-RRS: "The real pressure is on the starter-home market. Lack of inventory is making people overbid on those houses, and that is naturally driving prices up."

Denis A. DeSaix, MAI, SRA: "Real estate agents tell me they think this slowing is a good thing. It lets the market catch up to itself."

Charles B. Baker, SRA, AI-RRS: "A blip in interest rates or unemployment could cause some pullback."

Donald S. Boucher Sr., SRA: "There are some areas in the city [Washington, D.C.] once considered marginal locations where houses are now selling for more than $1 million."

Byron E. Miller, SRA, AI-RRS: "For most folks, their home is the largest investment they will ever make, and uncertainty breeds fear."

Valuation of energy-efficient homes

Appraisers working on the valuation of energy-efficient residential real estate can find multiple resources from the Appraisal Institute at

Caption: High home prices and the resulting affordability problems in much of the country--including San Francisco--can slow markets as potential homebuyers pull back or simply get priced out.
Appraiser market conditions

The median home price in the U.S. last year was $240,000,
an increase of $8,000 from 2017, according to analytics firm
Clear Capital, which tracks housing data in the 100 largest
metro areas. Here's how things look in the metros close to
or served by the appraisers quoted in this article.

                      Detroit   Los Angeles   Milwaukee   Minneapolis

Metro area

Median home           157,000     634,000      179,000      252,000
price ($)

Percentage change      12.6         7.1          8.9          6.3
in 2018 (%)

Percentage change      -18.9        6.1         -13.4         0.1
since 2006 peak (%)

Percentage change      136.4       91.6         46.7         67.6
since 2012
bottom (%)

Affordability index      1          10            2            5
(scale of 1-10,
1 being most

                      Phoenix   San Francisco   Washington, D.C.

Metro area

Median home           252,000      860,000          375,000
price ($)

Percentage change       8.7          9.3              4.3
in 2018 (%)

Percentage change      -11.0        22.4             -13.9
since 2006 peak (%)

Percentage change      103.7        127.4             37.5
since 2012
bottom (%)

Affordability index      7           10                9
(scale of 1-10,
1 being most

> Find data on all 100 metros at

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Title Annotation:Market Analysis
Author:Haapaniemi, Peter
Publication:Valuation Magazine
Geographic Code:1U9CA
Date:Jan 1, 2019
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