A Look at How Market Trends are used in the Real Estate Appraisal Process
The real estate market is constantly changing, and market trends play a crucial role in helping an appraiser determine property values. Real estate appraisers are tasked with determining the market value of a property, and they need to be aware of the current market trends to provide reliable market value opinions. In this blog post, we’ll explore the role of market trends when completing a real estate appraisal.
Understanding Real Estate Appraisal
Before we dive into the role of market trends in a real estate appraisal, let’s first understand what real estate appraisal is. A real estate appraisal is a process of determining the market value of a property. The value of a property is not just based on the physical structure and features of the property but also on the current market trends.
Market Trends and Their Impact on Real Estate Appraisal
When conducting a real estate appraisal there is more to the process than just assessing the physical features of the improvements. It’s also about analyzing the market trends that impact the value of the property. Market trends can have a significant impact on property values, and a real estate appraiser needs to be aware of these trends to provide an accurate appraisal.
Market trends can impact real estate appraisal in the following ways:
Impact on Demand
The demand for properties in a particular location can significantly impact property values. If there is high demand for properties in an area, it can lead to a higher appraisal value.
Similarly, if there is a low demand for properties in an area, it can lead to a lower appraisal value. Over the past several years we had a big increase in demand due to buyers taking advantage of lower interest rates.
Impact on Supply
The supply of properties in a particular area can also impact property values. If there is an oversupply of properties in an area, it can lead to lower property values.
On the other hand, if there is a shortage of properties in an area, it can lead to higher property values. Since the housing crash in 2008, there has been limited new construction of homes which has negatively impacted the amount of housing supply.
Impact on Interest Rates
Interest rates can also impact property values. If interest rates are low, it can lead to higher property values as it makes it easier for buyers to afford the mortgage payments, therefore, more buyers enter the market.
When there are more buyers, but a limited supply, this can drive prices up. After the pandemic, the Fed lowered interest rates to keep the economy moving.
This worked, however, because of the lower supply it resulted in home prices being driven up to the larger number of buyers. The contract price of many homes was much more than their original list price due to bidding wars from desperate buyers.
If interest rates are high, it can lead to lower property values as it makes mortgage payments higher and prices many buyers out of the market, therefore, there is not as much competition. Interest rates started to rise in the first half of 2022 which started to slow down the hot housing market we had after the pandemic started.
Impact on Economic Conditions
Economic conditions can also have a significant impact on property values. If the economy is performing well, it can lead to higher property values.
On the other hand, if the economy is performing poorly, it can lead to lower property values. If the job outlook is poor or people are not sure about job security they will not feel confident about buying a house because they may not be able to pay for it. This can lead to less competition which contributes to lower home values.
Impact on Demographics
Demographics can also play a significant role in determining property values. For example, if there is an influx of younger buyers into a particular area, it can lead to higher property values as younger buyers may be willing to pay more for properties that meet their needs.
Within the Birmingham, AL market there have been revitalization efforts in the downtown area with the conversion of business buildings into condominium units. In other areas of the Birmingham market, revitalization has occurred in older neighborhoods with homes being purchased and updated by buyers who like the proximity to the downtown entertainment district.
These trends can impact real estate appraisal in various ways, and a real estate appraiser needs to be aware of these trends to provide an accurate appraisal.
Using Market Trends in Real Estate Appraisal
Real estate appraisers use market trends to develop an educated opinion on the market value of a property. To do this, they gather data on recent sales of comparable properties in the area. This data is then analyzed to determine the current market trends in the area.
Real estate appraisers also consider other factors, such as the physical features of the property, its location, and its condition, to determine its value. However, market trends play a crucial role in determining property values, and real estate appraisers need to be aware of the trends to provide an accurate appraisal.
Challenges Faced by Real Estate Appraisers
Real estate appraisers face several challenges when it comes to using market trends in real estate appraisal. One of the significant challenges is the lack of reliable data.
One of the main sources of data that an appraiser uses is their local multiple listing service. If this data is not accurate then it can impact the accuracy of the appraisal.
One of the most important pieces of information that is necessary for an accurate appraisal is the square footage of the comp. If this information is not reliable then it is difficult to develop a dependable appraisal.
Another challenge faced by real estate appraisers is the interpretation of data. Market trends can be complex, and it can be challenging to interpret the data accurately, therefore, appraisers need to have a deep understanding of the local real estate market and the factors that impact property values to interpret the data accurately. This knowledge is referred to as geographic competence and users of appraisal services should make sure the appraiser they hire has the geographic competence for the area the property is located.
Conclusion
In conclusion, market trends play a crucial role in real estate appraisal. Real estate appraisers need to be aware of the current market trends to provide an accurate appraisal. Market trends can impact property values in various ways, including demand, supply, interest rates, economic conditions, and demographics.
Real estate appraisers need to gather reliable data on recent sales of comparable properties in the area and interpret the data accurately to determine the fair market value of a property. Despite the challenges faced by real estate appraisers, the use of market trends in real estate appraisal is essential to ensure that property values are determined accurately and fairly.
If you have any questions about the appraisal process feel free to contact me and as always thanks for reading.
I think market trends are the most fascinating part about being an appraiser. The other stuff is fine, but it’s the market analysis that is the most exciting part for me at least. 🙂
I can see that! You’re the king of market trends and you are able to tell a story of value with graphs and charts. Keep up the great work!