California is considered a “declining market” by lenders, the secondary market, and appraisers alike. Appraisers have been instructed to adjust the “comparable sales”, on a Uniform Residential Appraisal Report (Form 1004), by 1.5% per month. What this means is that the appraiser will use an exact model match (same size, floor plan, and location in the subdivision) from December, and lower the price by 3%, for a current appraisal. For example, if the property sold in December for $300,000, the adjusted price in February will be $291,000.
Sounds reasonable, right? Sometimes, that’s not necessarily a fair depiction of current market conditions.
Much of the Southern California market is driven by bank-owned properties. The banks, in an interest of disposing of the property, pursue a “fire-sale” pricing method in order to generate multiple offers. Ask buyers in the tony San Fernando Valley how hard is is to buy a bank-owned home. One of our borrowers has made over 30 offers, unsuccessfully, to purchase a bank-owned property,
The free market has “priced in” future market declinations and has “discovered the true bottom”. Still, appraisers have their hands tied. Pursuant to directives from the secondary market, the appraisers adjust those “free market base prices” because they were closed a month or two ago. The cycle becomes never ending. The lower adjustments provide an unnatural price pressure, driving prices even lower. The policy then becomes a market factor.
The policy can be counterintuitive to its originally stated
purpose; to provide a “true” reflection of this “declining” market. It
assumes that prices will continue on an 18% annual decline, forever.
At a certain price , a property becomes less costly to own than to rent. Many analysts believe that price establishes a “natural” bottom for the property, in a balanced market (six months absorption rate). The theory is that buyers would be crazy to rent the property when ownership is less expensive. Compunction then becomes an economic necessity; if a buyer doesn’t make his mortgage payment, the alternative is more costly.
This fundamental analysis should trump the declining market adjustments, at best or become an important footnote, in the least, on the appraisal report.
