Newz: DEI and Appraisers, New GSE Market Analysis Deadline Feb. 4 January 31, 2025 What’s in This Newsletter (In Order, Scroll Down) LIA AD: Weather Impact What is the Cost Approach to Real Estate Appraisal? ‘Unparalleled’ 3-Mansion Compound on Miami’s Exclusive Palm Island Splashes Onto the Market The post Appraisals and the Cost Approach appeared first on Appraisal Today.
Newz: DEI and Appraisers, New GSE Market Analysis Deadline Feb. 4
January 31, 2025
What’s in This Newsletter (In Order, Scroll Down)
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LIA AD: Weather Impact
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What is the Cost Approach to Real Estate Appraisal?
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‘Unparalleled’ 3-Mansion Compound on Miami’s Exclusive Palm Island Splashes Onto the Market for $150 Million
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DEI and Appraisers
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Fannie and Freddie Forecasts
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Fannie, Freddie: New Market Analysis Requirements February 4th
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Mortgage applications decreased 2.0 percent from one week earlier
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What is the Cost Approach to Real Estate Appraisal?
By Kevin Hecht
Excerpts: When to Use the Cost Approach
There are circumstances when it’s necessary to use the cost approach, for example, unique properties and new construction. The cost approach can also be used to support the sales comparison approach.
Fannie Mae only accepts the sales comparison approach as its primary valuation tool. However, that does not preclude an appraiser from also using the cost approach to substantiate their findings. And there are other lenders who may accept the cost approach over other real estate appraisal methods for certain properties or situations…
Some Disadvantages of Using the Cost Approach
There are inherent benefits of using the cost approach, especially when you’re tasked with challenging properties that have little or no comps. But there are also some downsides.
One of the primary disadvantages is the assumption that land is available for purchase to build an identical property. Land is a scarce resource. When comparable land sales are not available, the value must be estimated.
The bigger issue here is undervaluing the land costs based on scarcity. In real estate, location is everything. A small ocean-front cottage has its value because of the land it sits on, not necessarily its four walls…
Other disadvantages include how to depreciate an older property or find costs for similar building materials. This can be particularly tricky when using the reproduction method of the cost approach or appraising a historic home.
Appraisers should consider whether the cost approach is the best tool to use. In many situations, it’s best used in tandem with the sales comparison approach.
Tips for Using the Cost Approach
As part of our monthly survey series, we asked our community of real estate appraisers, “What’s your best tip for using the cost approach to appraise?” They shared many helpful comments, including common pitfalls to avoid as well as general advice and recommendations. Here’s what they said:
“Use and research valuable comps and educate yourself on the surrounding market.”
“Call local developers for better support on cost estimates. Make friends with builders.”…
To read more, Click Here
My comments: When I saw the article topic I thought it would be boring. Not! When I read it I realized it was one of the best on the Cost Approach I have read! If you only do GSE appraisals, you probably don’t use the Cost Approach very often, except for new construction. This article explains when and why. It also includes “basic” info such as reproduction vs. replacement. Keep it as a reference for the future when you may need to use the Cost Approach.
When I first started appraising in a Northern CA assessor’s office in 1975, the Cost Approach was the only approached used for decades for all properties. My supervisor devised a table based on square footage for homes which we used.
In the Oakland CA firestorm in 2021, many of the homes had reproduction replacement in their insurance policies. Many were historic homes with features that were very difficult to reproduce, assuming you could find anyone who still knew how to build them. The home owners with reproduction costs got very large payments from their insurance companies. Many had larger homes built with sometimes very unusual designs. The insurance companies learned their mistake and never offered reproduction again.
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3-Mansion Compound on Miami’s Exclusive Palm Island Splashes Onto the Market for $150 Million
Excerpts: 3 homes, 92,00 sq.ft. 300 linear ft. of water frontage
The pricey property, which initially debuted in 2023, was relisted in 2024 at the same price. Now, with Florida’s luxury housing market experiencing a major boom, the compound is back on the market with the same sky-high price.
“Potential buyers might include high-profile individuals like celebrities or CEOs, investors, entertainers or hosts, or luxury lifestyle seekers,” he tells Realtor.com®.
“This offering appeals to those who prioritize exclusivity and are willing to invest significantly for a unique, turnkey luxury compound.”
The trio of homes was assembled by owner Jorge Luise Garcia and the Adria, Maria, Adrian Almeida Trust. They were purchased separately over a period of 17 years.
The first of the three mansions was purchased in 2004 for $3.45 million, the second in 2019 for $13.9 million, and the third in 2021 for $17 million, for a total of $34.35 million, according to property records.
To read more, Click Here
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DEI and Appraisers – Appraisal Bias and Appraiser Hiring
Appraiser Hiring
Source: Appraisal Institute 2023 U.S. Valuation Profession Fact Sheet
Effective 08/01/2023
Men 67.9%
Women 26.9%
Race/Ethnic
White 77%%
Hispanic/Latina 5.5%
Black 2.2%
Asian 1.8%
To download the Fact Sheet (PDF), Click Here
My comments: I would have never become an appraiser in 1975 without affirmative action. I was the first woman appraiser hired in a northern California assessor’s office (Butte County).
I was put in the back of the room with cubicles because they were not sure about having a woman there. I studied science and worked in labs for 7 years with few women. When I attended my first AIREA and SREA classes there were very few women there. Women were supposed to work inside: clerical work, teachers, nurses, etc.
Women are included in the new DEI issues.
I don’t know what will happen with the appraisal organizations and The Appraisal Foundation that promote appraisal diversity.
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Appraisal/Appraiser Bias Accusations
Per a recent appraisersblogs post: “removal of all appraisal bias propaganda from the official whitehouse.gov website. One of the first casualties was the insidious Property Appraisal and Valuation Equity (PAVE) initiative…”
My comments: When I Googled appraiser bias and PAVE many links showed up. HUD and other related websites still have these types of posts on their web sites.
I am personally offended about the bias accusations. I renewed my California appraiser license early last year. I had to take several bias classes and USPAP had a lot of bias content. Useless waste of time. I took them all in a 1 week period. Over the next weekend I considered quitting appraising, but decided to stay because I don’t do any lender appraisals. If I was a res appraiser doing GSE appraisals I would have seriously considered quitting appraising.
To read the appraisersblogs post and the 100+ appraiser comments, Click Here
My comments on the appraisersblogs post: “Appraisers Freed from DEI Propaganda” We are not “freed”…. maybe later or never. There are over 100 appraiser comments, including some political.
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Exploring the Roots: Appraisal Disparities, Regulatory Insights, and Real Estate
Valuation Challenges in Illinois
January 1, 2025
This recent report from the Illinois appraiser regulator has details and analysis of the issues above plus more.
To read the report, Click Here
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Disability – your greatest risk
In the September, 2024 issue of Appraisal Today
Many appraisers worry about the risk of getting sued on an appraisal, but one of your greatest risks is becoming disabled and unable to work. To appraise at your full capacity, you have to be able to walk, hear, and see.
If disabled, you may be able to continue working, but at reduced capacity.
For example, you may not be able to do field work but you can do desktop appraisals and reviews. But, you may not be able to work at all for a period of time.
Since appraisers spend a lot of time driving, getting in an auto accident is a
much higher risk than for people working in an office. Other risks include getting injured during an inspection, plus the risks we all have of a serious medical problem, such as cancer.
Jack Jones had a successful appraisal business, netting him over $100,000
per year. Combined with his wife’s income of $60,000 per year as a dental
hygienist, they had a very comfortable life, with two kids in college and one in high school.
One day Jack was driving on the freeway and was rear-ended by a large
truck. He had emergency surgery for massive injuries. His family was informed that he would survive, but it will be many months before he can return to work, even on a part-time basis.
After the initial jubilation that he would live, his wife started thinking about
how they would make it financially. His medical insurance would cover much of the medical and rehabilitation costs. All of Jack’s net income was generated by his own appraising and reviewing. The fee splits from his appraisers would not even cover his overhead.
Jack and his wife had enough in savings to cover 4 months of lost income,
but Jack did not have disability insurance.
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Fannie and Freddie Forecasts
Fannie Economic Developments – January 2025
Mortgage Rates Remain a Headwind to Home Sales, While Slower Home Price Growth is Expected
Excerpts: Incorporating both an upward revision to our mortgage rate forecast and a downward revision to our home sales outlook results in a downward revision of our single-family mortgage originations forecast to $1.92 trillion in 2025 (previously $1.97 trillion) and $2.27 trillion in 2026 (previously $2.37 trillion). This follows estimated originations of $1.69 trillion in 2024.
Though we think the increase in longer-term rates is, in part, reflective of recent data pointing to continued momentum in economic growth, the rise in the 10-year Treasury, and therefore mortgage rates, reduces the prospects of a meaningful home sales recovery in 2025. As a result, both affordability challenges and lock-in effects will persist, hindering sales.
We now project the 30-year mortgage rate to end 2025 and 2026 near 6.5 percent and 6.3 percent, respectively. This is approximately 20 and 40 basis points up from our December outlook, respectively. We have therefore trimmed our total home sales forecast for 2025 to 4.89 million (previously 5.00 million) and for 2026 to 5.25 million (previously 5.47 million).
To read more, Click Here
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Freddie Mac January 24, 2025
Economic, Housing and Mortgage Market Outlook – January 2025
Excerpts: Mortgage rates remained higher than expected in 2024. Unlike last year when many were anticipating that mortgage rates would decline, in early 2025 the prevailing sentiment is that rates will stay higher for longer. This may impact prospective buyers and sellers as we get into spring. While last year, prospective buyers and sellers anticipating rate declines may have stayed on the sidelines waiting for lower rates, this year, they may make a move earlier as they are not expecting rates to move lower. This should increase home sales relative to last year, though the absolute level of sales is still likely to remain well below historical averages.
The rate lock-in effect is also expected to cool off in the new year, adding more inventory to the market. Our estimate of the average interest rate lock-in effect for conventional mortgage borrowers was up to $47,800 in November 2024, which is up from an estimated $42,000 in October 2024, but significantly below its peak of over $65,000 in October 2023. Even if mortgage rates stay flat or decline modestly, amortization of mortgage balances will bring down the lock-in effect and make it more palatable for potential home sellers to list their property despite having a low mortgage rate.
To read more, Click Here
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Fannie, Freddie: New Market Analysis Requirements February 4th
by Isaac Peck
Fannie Mae and Freddie Mac (the GSEs) have not so quietly published new requirements for appraisers that will be effective February 4th, 2025. Lenders have been encouraged by the GSEs to “implement these policy changes” immediately, but face a hard deadline for the requirement implementation in early February.
Adjustments
At the heart of the new GSE requirements is the idea that appraisers need to provide additional analysis of the market and make time adjustments (or not) based on what the market indicates.
So just what are these new requirements for appraisers?
According to Fannie’s Selling Guide Announcement (SEL-2024-07), appraisers will be required to:
Establish a minimum timeframe of 12 months from which the overall market trend must be derived;
Identify that the overall market trend may be different from the adjustments applied to individual comparable sales;
Report the market analysis that supports both the indicated overall market trend and market derived time adjustments for changes in market conditions.
The backdrop of this new requirement is how appraisers made time adjustments during the COVID-19 “boom” years of 2020 through 2022, Fried says. “During the COVID–19 years when most markets were seeing over 20 percent appreciation Year-over-Year (YoY), appraisers were only making adjustments 20 to 25 percent of the time,” says Fried.
In a webinar with George Dell back in 2022, Scott Reuter, Chief Appraiser at Freddie Mac, explained that appraisers’ lack of market conditions adjustments creates a lack of credibility in their reports. “A couple of highlights and what we were seeing was that the amount of time that appraisers were making this adjustment, even trying to develop a market condition or time adjustment, was maybe 20–25 percent of the time, and appraisers appear to be very conservative even when they were developing the adjustment,” Reuter says.
By conservative adjustments, Reuter is referring to situations where a full market analysis might lead Freddie to expect an appraiser to make a six percent time adjustment, but the appraiser only applies a one percent adjustment, for example.
What Are Appraisers to Do?
This latest change to the GSEs’ Selling Guide is one of the most specific requirements that have been put on appraisers, especially as it relates to adjustments.
Some appraisers may try to use spreadsheet programs like Microsoft Excel to import data from their Multiple Listing Services (MLS) and then manually manipulate the data to create graphs and answer specific questions about each comparable.
Alternatively, appraisers will search to find tools that will help them answer these types of market analysis questions that will meet the GSEs’ requirements.
To read more, Click Here
My comments: The graph in the article is not required by the GSEs. I recently attended a free George Dell webinar on this topic. Reuter is still saying too many appraisers are making no time adjustments or adjustments that are too small.
When I started my appraisal business in 1986, local appraisers told me never to make time adjustments or they would lose the client. A while later, several appraisers I knew went out of business when they made negative time adjustments when home prices were dropping dramatically in their markets.
I was trained at an assessor’s office. When I started there in 1975 we were using time adjustments. I only worked for lender clients that accepted them.
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HOW TO USE THE NUMBERS BELOW. Appraisals are ordered after the loan application. These numbers tell you the future for the next few weeks. For more information on how they are compiled, Click Here.
Note: I publish a graph of this data every month in my paid monthly newsletter, Appraisal Today. For more information or get a FREE sample go to www.appraisaltoday.com/order Or call 510-865-8041, MTW, 7 AM to noon, Pacific time.
My comments: Rates are going up and down. We are all waiting for rates to drop in 2025.
Mortgage applications decreased 2.0 percent from one week earlier
WASHINGTON, D.C. (January 29, 2025) — Mortgage applications decreased 2.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 24, 2025. This week’s results include an adjustment for the Martin Luther King holiday.
The Market Composite Index, a measure of mortgage loan application volume, decreased 2.0 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 9 percent compared with the previous week. The Refinance Index decreased 7 percent from the previous week and was 5 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier. The unadjusted Purchase Index decreased 4 percent compared with the previous week and was 7 percent lower than the same week one year ago.
“Mortgage rates were mixed last week, and the 30-year fixed rate remained unchanged at 7.02 percent. Application activity was slightly weaker, primarily because of a 7 percent decline in refinancing across both conventional and government loans,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase activity decreased slightly, but applications for FHA purchase loans were a bright spot, increasing by 2 percent. New and existing-home sales ended 2024 on a strong note, and if mortgage rates continue to stabilize and for-sale inventory loosens, we expect a gradual pick up in purchase activity in the coming months.”
The refinance share of mortgage activity decreased to 37.1 percent of total applications from 40.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.8 percent of total applications.
The FHA share of total applications increased to 16.7 percent from 16.5 percent the week prior. The VA share of total applications decreased to 13.2 percent from 14.6 percent the week prior. The USDA share of total applications increased to 0.5 percent from 0.4 percent the week prior.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) remained unchanged at 7.02 percent, with points increasing to 0.63 from 0.62 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate remained unchanged from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $766,550) increased to 7.02 percent from 6.98 percent, with points increasing to 0.57 from 0.50 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 6.72 percent from 6.74 percent, with points increasing to 0.94 from 0.90 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 6.37 percent from 6.45 percent, with points increasing to 0.74 from 0.64 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 5/1 ARMs increased to 6.44 percent from 6.41 percent, with points increasing to 0.62 from 0.59 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The survey covers U.S. closed-end residential mortgage applications originated through retail and consumer direct channels. The survey has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, thrifts, and credit unions. Base period and value for all indexes is March 16, 1990=100.
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Ann O’Rourke, MAI, SRA, MBA
Appraiser and Publisher Appraisal Today
1826 Clement Ave. Suite 203 Alameda, CA 94501
Phone: 510-865-8041
Email: ann@appraisaltoday.com
Online: www.appraisaltoday.com
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