Declining Markets Part 2

So what defines a “Declining Market?” Some investors have taken their large paintbrush out and if an area; county, city or zip code has seen their average sales price drop in the last quarter; they are calling it a “Declining Market.” Others have chosen a smaller brush and have stretched the time out by reviewing the last six months. Then the rest of the investors have left the defining to the appraisers, which is whose shoulders it should fall on. They are the ones whose job is to provide support that the investor is making the right decision to purchase a loan on a certain piece of property.

So when I checked with a few appraisers to learn their definition of “Declining Market” I was not surprised to find that each appraiser had their own definition of “Declining Market.” The thing to remember about appraisers is that what they do is not a science; it is more of an art. So again we use the paintbrush analogy and there are some appraisers that are running scared and using their large paintbrush and putting the term “Declining Market” in all of their appraisals. Others are taking the time to do a statistical review of the cost of the homes in the various areas and are applying the term when there is a continued decrease of value that exceeds 5% over three six month periods and then there are others who are only applying the term if the valuations have changed by greater than 10%.

In addition, most investors are only concerned with reducing the loan to value on Conventional loans. On FHA and VA loans, the appraiser has factored the market into the value and it does not have an impact on the amount the borrower can borrow.

For questions or comments on this, please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.