Blue Oak Blog

Declining Markets

There is some confusion as to how declining markets are determined in an appraisal report. The first step is to determine the subject’s neighborhood. This is the area that has some commonality with the subject and is affected by similar market forces. Often a zip code can be used. Sometimes a school district may define the boundaries and some homes are defined by the development. Lake of the Pines or Sun City cannot be considered similar to the areas around them.

Once the neighborhood is determined, the market trends can be researched. Web sites like trulia.com, cyberhomes.com, and dqnews.com can give the trend data for a zip code or city. When using these sites would be inappropriate, the MLS needs to be used.

An example would be Sun City, Lincoln. The zip code for this area shows a declining market, which provides accurate data for the Twelve Bridges area and Lincoln Crossing, but not for Sun City. Statistics can be taken from the MLS by drawing the search borders around only Sun City. Then checking the statistics, by month or quarter, you will find the low, median, average, and high prices for each time period. These can then be graphed to show the trend and the raw numbers can be used to show the change in value by month, quarter or year. The appraiser needs to explain this in the report so that a reviewer unfamiliar with the area will understand why you have different conclusions than the web site data they are using.

Do not assume that all areas are declining. There are some neighborhoods that are stable, and there are actually some neighborhoods that show some increase in value. The appraiser needs to make sure that the subject home and it’s neighborhood are the focus and that they support that in the report.

I have attached a recent article regarding Fannie Mae and declining markets.

Fannie Mae Scraps “Declining Markets” Policy

As of June 1, Fannie Mae has adopted a new, single down payment policy in all communities across the nation for conventional, conforming mortgages the company will purchase or guarantee. This new national down payment policy, announced May 16, will supersede the “Maximum Financing in Declining Markets Policy” Fannie Mae adopted in December 2007, which required higher down payments in markets where home prices are declining. That policy typically added 5 percent to the down payment needed in 8,000 to 12,000 ZIP codes where home values were dropping. Many of Fannie's critics saw it as a long-overdue dose of fiscal castor oil necessitated by too many shaky loans to borrowers who had little of their own funds on the line.

Starting with loan applications taken on June 1, 2008, Fannie Mae will accept up to 97 percent loan-to-value ratios for conventional, conforming mortgages processed through its Desktop Underwriter® automated underwriting system, and 95 percent loan-to-value ratios for loans underwritten outside of Desktop Underwriter, in all geographic locations in the United States.

The new policy now equalizes down payment requirements across the country, regardless of local market conditions. Fannie said the change was possible—and sound—because its automated underwriting programs were upgraded to assess loans more precisely.