How much have home prices gone down? That’s the big question right now and worthy of discussion. First and most importantly, home prices are not doing the same thing everywhere. As an example, Black Knight Home index for 2022 shows Denver declining 7.8%, San Francisco declining 13.1% and Louisville Ky with less than a 1% decline.
Just as home price change from city to city and state to state at differing rates, the same applies to sub-markets within the same metro area: Arvada change in home value is different than Centennial change in home value. Further, even within a given city, certain sub-markets are behaving differently as well. Condo’s rate of change in value within Centennial could be very different than the rate of change in Centennial for luxury homes.
Recently I had an opportunity to review two appraisals that occurred days apart, of the same single- family home in the metro Denver area. One concluded that there was no substantive change in value trends, the other concluded that the market was depreciating at a rate of -12% annually. This is a huge gap in analysis. Consider that a home worth $500,000 one year ago would be worth $60,000 less a short twelve months later with a market change adjustment applied at -12%.
Appraiser A included a detailed market analysis. It illustrated changes in price per square foot of gross living area, changes in price of finished area, and changes in price of total square foot. Also included was detail showing marketing times remained less that 90 days (generally a sign of a healthy market) and also noted that the list to sales price ratio remained well over 95% of list price. Appraiser A concluded that the market had remained stable and justified this conclusion with a year over year price change analysis of all single family home sales in the city of Denver. In essence, the appraiser concluded that the median price of a single-family home in January of 2022 is the same as the median price of a single-family home in January of 2023. As a result, Appraiser A made no adjustments in the sales comparison analysis for market change.
Appraiser B also included a detailed market analysis. It illustrated changes in price per square foot of gross living area, changes in price of finished area, and changes in price of total square foot. Also included was detail showing marketing times remained less than 90 days (generally a sign of a healthy market), and also noted that the list to sales price ratio remained well over 95% of list price. Appraiser B concluded that the market had in fact declined at a rate of 12% annually. This conclusion and market change adjustment in the sales comparison analysis was supported by market change data from the subjects neighborhood that showed homes similar in size had depreciated at an annual rate of -12% in comparing the most recent 0-3 month old sales, versus sales that occurred 7-12 months ago. As a result, Appraiser B made an adjustment of -12% to sales illustrate in the sales comparison analysis.
Which one gives the best support of market change? With both appraisers showing supportive data, it can be confusing to reconcile which approach is most accurate. Appraiser A is correct, values had not changed in comparing values to same month last year. The question of what happened in between January of 2022 versus January of 2023 is best answered by Appraiser B.
As you recall, January 2022 was imbalanced in favor of sellers with low lending costs, low inventory and frothing market conditions with often times multiple offers well above list price. By June of 2022, rapidly increasing borrowing costs had clearly taken its toll on market conditions. Buyers went from having a fear of missing out (FOMO) in the spring of 2022 to a fear of getting stuck (FOGS) in the fall of 2022.
A helpful metaphor: How much do I weigh compared to one year ago today? And how much do I weigh since July 4? Those could be two different answers, and that’s how real estate stats are working right now. Two very distinct numbers.
Most important for proper market conditions adjustments in the sales comparison analysis is this: What has happened to the marketplace in between the date of sale of each comparable sale, and the date of appraised value? This question is best answered with recent market data analysis.
Although it is important for appraisers to look at year-over-year data, more recent data needs to be addressed and analyzed. Some appraisers will focus solely on year-over-year stats, resulting in inaccurate conclusions and false narratives.