Mortgage Lending Expert: Home Price Trends

FinanceMortgage & Debt

  • Author Joffrey Long
  • Published February 4, 2010
  • Word count 932

Where are home values going? Do real estate pros and economists have the inside scoop – and they just aren’t sharing? ………not quite.

A number of organizations compile and analyze data about housing values - often including projections about where prices are headed. To get the best possible information for use in real estate lending and investing, we’ve reviewed many of these reports. They generally belong to one of two major categories, each containing a critical flaw:

  1. Realtors, Homebuilders, Mortgage Bankers and other "special interest" groups have their own full time economists. They produce data compilations and projections about home values and market activity.

Major flaw: It’s biased information. Those whose livelihood is directly

linked to the number of homes that sell have a vested interest in always predict-

ing a positive outlook for home values. During the most inflated home market

in our lifetimes, the 2006-2007 housing boom, the real estate brokerage industry’s

key economist indicated that the market was stable and that no downturn in prices

was likely. Advice doesn’t get any worse than that!

  1. Legitimate research from economists, data providers, and governmental

bodies: This research tends to be from a wider range of sources. These providers are simply selling their research, (rather than influencing homebuyers) so they tend to give non-biased conclusions about the data.

Major flaw: The bulk of the data and analysis available from these providers consists of statistics for an entire county, city, or zip code, and not a specialized market area. Imagine your own zip code – if a number of lower priced homes happened to sell in a given period, the "average sales price" for your area would

be artificially low, failing to include more expensive homes that didn’t happen to sell.

For real estate lenders and investors, this doesn’t work. Given the importance of knowing where a market is going, we need accurate, unbiased information about what’s going in the specific neighborhoods in which we invest.

Finding a better way…

First, we went looking for reliable sources of information. We spoke to various

research providers in the real estate industry, executives at real estate and

mortgage companies, and to several appraisal firms. We were unable to find a

reliable source of research and analysis that addressed our concerns.

Then, working with our own staff, we defined what information we needed and

what the problems with available data were.

As a result of our research, we realized that we needed specific information

about homes in different markets, with the ability to spot trends in smaller

"sub-markets." There was only one choice. We had to develop our own

system. We did. - a proprietary system for data gathering, data analysis, and

value tracking.


The system consists of six key components;

  1. First, we identified seventeen California homes and townhomes that

represented a cross section of the types of properties we make loans on -

homes ranging in size from 750 to 3,600 square feet, with market values

from $75,000 to $900,000, and in areas ranging from inner city to suburban to outlying areas.

  1. We documented all of the key information such as square footage, lot size, age, amenities, and similarity to other homes in the area. We always make the assumption that the property is in average condition, comparable to the other homes selling in the same market area.

  2. We carefully re-appraise that same home every six months, (and sometimes more often, as necessary) completely starting from scratch, researching homes that have recently sold in the market, as well as similar homes listed for sale.

  3. We then analyze the data, noting specific changes in the value of the home.

After determining if the home’s value has increased, declined, or remained stable, we start to research other data available on the neighborhood, the immediate market area, the zip code, the city and the county. Often, the specifics of a $500,000 home in a neighborhood may indicate no change in value, while the statistics relating to $900,000 homes in that same market tell a very different story. We often find large differences between our findings and the general statistics available about the same zip code or city.

  1. We then research the surrounding local economy and changes occurring in the local city of county, etc. We study the reasons for any decline or increase in value that may be different from the available data about trends in the larger market area. This part of the process is critical. Understanding the "pocket areas" and smaller sub-markets that completely escape most commonly available research can help avoid making a "bad" loan or bad investment decision.

  2. When we receive a loan request or evaluate an investment opportunity, we’re often provided with a property appraisal. We almost always re-appraise the property ourselves, or order an appraisal from an appraiser that we trust. As part of our review of appraisals, we use our value research. It’s unsettling to realize that most appraisers are generally unaware of this type of research and analysis in evaluating property.

This represents a lot of additional work – but does a tremendous amount for the lending and investing process. Many smaller areas, within larger cities or zip codes are increasing or decreasing in value, but not in the same direction as the zip code or city statistics show - all information unavailable from the special interest groups.

The risk imposed by property value fluctuation requires close attention,

careful research, and study. While we don’t have all the answers, this

approach to valuation improves the quality of investment and lending

decisions while reducing risk in the process.

Joffrey Long provides mortgage lending and real estate advice and insight for homebuyers, real estate investors and investors in mortgage loans. He’s a mortgage lender and real estate investor himself, and has been in the industry for 34 years. He’s also called upon to testify as an expert witness in mortgage related litigation matters.

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