With the emergence of new technologies, lower costs, faster prep times, and HUD questioning appraisal accuracy, appraisers are facing some tough times. Proper valuations are needed when conducting a sale of a home, but costs are high, and time is of the essence. While appraisers are at the center of the lending process, so are many online home value estimates, driving the price of information down and cutting the response time to minutes. Kenon Chen, Executive Vice President of Strategic Partnerships at Clear Capital, discusses how Automated Valuation Models (AVMs) are creating cost-effective strategies for lenders and gaining popularity as an effective and trustworthy solution. However, proper valuation expertise and market- level research is conducive to creating a machine-learning approach when calculating a lender-grade AVM. 16 MY TAKE: TALENTED TECH: ALTERNATIVE VALUATION SOLUTIONS GIVE LENDERS MORE FLEXIBILITY IN 2019 Real estate can be a wild roller coaster over time, particularly true in the Western states of the nation. This analysis reveals five western markets that stand out when it comes to steep upward climbs in median home prices since the bottom of home prices in 2012. Is another recession on the horizon? 20 SPOTLIGHT: IS THE WEST IN FOR ANOTHER WILD RIDE? 34 BIG DATA SANDBOX: STATES THAT SAW AN UPTICK IN FORECLOSURES With the number of completed foreclosures (REOs) on the decline, home buyers and investors looking for a “deal” are having to search high and low. However, ATTOM Data Solutions may help uncover some areas where buying a home could be more affordable based upon counties where banks are having to foreclose. 38 DATA IN ACTION: COUNTIES WITH THE MOST ABUNDANT FORECLOSURE-BUYING OPPORTUNITIES This infographic shows the results of ATTOM Data Solutions Year-End 2018 Foreclosure Market report, which incorporates all stages of filing during the foreclosure process. While the narrative for most of the nation experienced a decline in foreclosure activity, there were still states where foreclosure filings bucked the trend. 04 FEATURED ARTICLE: WILL AVMs CREATE A WORLD WITHOUT APPRAISERS?
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SALES PRICES VS. AVM
MEDIAN SALES PRICE
potential consequences,” explains Isaac Peck, writing for Working RE. “In addition to pressure and harassment from homeowners, agents, and Appraisal Management Companies (AMCs), appraisers also run the risk of being branded ‘deal killers’ and losing both lender and AMC clients; a high price for simply doing one’s job – performing accu- rate, unbiased appraisals.” COMPARATIVE MARKET ANALYSIS (CMA) Like other professions, apprais- ers have marked off their terri- tory. You need a license to be an appraiser. You can’t get a license without training and experience. You cannot sell an “appraisal” un- less you’re a licensed appraiser. Real estate brokers can offer a Competitive Market Analysis or a Comparative Market Analysis (known generally as CMAs in either case)
THEORYVS. REALITY Appraisers are at the center of the lending process. Lenders and borrowers hire them to prevent two forms of financial tragedy: over-lending by mortgage lend- ers and overpaying by real estate buyers. Lenders don’t want to put up more cash than they should and thus increase their risk if a proper- ty must be foreclosed. At the same time, we don’t want buyers to pay inflated home prices as a result of innocence or exuberance. Proper valuations surely benefit the lending system in general but when it comes to individual trans- actions the view is often different. First, appraisals cost money at the very moment when borrow- er funds are likely to be tight. No doubt many residential borrowers would be perfectly happy to avoid $500 or so in appraisal expenses. Second, while there’s a lot of talk about the need for accurate
appraisals, the real goal in many transactions is simply to finish the deal and get people paid. If the appraised value is less than a property’s sale price then contract terms will need to be “modified,” a polite term which means maybe the price goes down or the buyer finds more cash. Or both. If the parties cannot make adjustments then the deal can end, suddenly and unhappily, forcing everyone to start all over again. There will be no sale dollars for sellers who may have a contract to purchase a replacement property. There will be no dream house for buyers, no commission for brokers, and no fees for lenders. A whole bunch of people are likely to be very unhappy with a low appraisal, even one which is unquestionably on target. “A real estate appraiser who submits an appraisal that is un- der the contract price knows the
Will AVMs Create a World Without Appraisers?
T he real estate market has had a good run during the past few years, but for one group the sto- ry has been different. Appraisers are facing tough times. Their job numbers are in decline, business is being lost to high-tech compet- itors, management companies are BY PETER G. MILLER, STAFF WRITER
cannibalizing fees, and HUD has questioned the accuracy appraisals provide. To make matters worse, federal regulators have proposed new rules to make residential appraisals unnecessary for huge numbers of transactions. The oddity is that no one doubts
or denies the importance of in- dependent valuations. Instead, appraisers are losing out to new technologies, lower costs, and faster prep times. The need for valuations is there but that need is increasingly filled by big data and artificial intelligence (AI).
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estimating the listing or purchase price of a property but they can never call it an “appraisal.” Real estate regulators routinely require plainly-written CMA dis- closure statements so that no one misses the point. Maryland, for example, says real estate licensees “may prepare a competitive market analysis of a specific property for a client, prospective client, or cus- tomer. The analysis shall include the following statement printed conspicuously and without change on the first page:”
No matter how well done, lenders will not substitute a CMA prepared by a real estate licensee for an ap- praisal. That’s because the CMA is produced with the intent of help- ing someone buy or sell property, actions from which the broker hopes to gain a fee. Appraisers, in con- trast, are paid for the act of apprais- ing, regardless of the final number. BROKER PRICE OPINION (BPO) Another potential appraisal sub- stitute is the broker price opinion (BPO), a form of home value report provided by local real estate bro- kers. A drive-by BPO, one where the interior of the home is not checked, is frequently used to es- tablish that a property in a foreclo- sure or short sale simply exists. Drive-by valuations have their pros and cons. They’re certainly quick and cheap when compared with a full-blown appraisal. Proper- ty owners do not need to fix interior
AVERAGE PURCHASE LOAN AMOUNT VS. AVERAGE AVM
A real estate appraiser who submits an appraisal that is under the contract price knows the potential consequences. In addition to pressure and harassment from homeowners, agents and Appraisal Management Companies (AMCs), appraisers also run the risk of being branded ‘deal killers’ and losing both lender and AMC clients; a high price for simply doing one’s job - performing accurate, unbiased appraisals." ISAAC PECK
AVG PURCHASE LOAN AMOUNT
COMPETITIVE MARKET ANALYSIS DISCLOSURE
This analysis is not an appraisal. It is intended only for the purpose of assisting buyers or sellers or prospective buyers or sellers in deciding the listing, offering, or sale price of the real property.
spaces. There’s no need for an ap- pointment. Alternatively, the extra value created by a new kitchen or bath can’t be seen, hurting owners. The rules for BPOs vary by state. In some jurisdictions real estate licensees are allowed to provide a BPO but cannot charge for it. In still others, brokers may both do BPOs and get a fee for the service. DODD-FRANK At the federal level, the use of appraisal alternatives is restricted – but hardly banned. Dodd-Frank says, “In conjunction with the purchase of a consumer’s principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.”
evaluation because, among other things, it does not provide a proper- ty's market value.”
The Dodd-Frank language in- cludes an impressive number of BPO loopholes. The wording applies to the “purchase of a consumer’s principal dwelling.” Does this mean a BPO can be used for refinancing a principal residence or the purchase of a second home? What about commercial properties? If BPOs seem poised to compete with appraisals in some areas under Dodd-Frank, that’s not the whole story. In 2010, federal regulators issued their Interagency Appraisal and Evaluation Guidelines which built on the Dodd-Frank standards. The guidelines state, “A valuation method that does not provide a property's market value or sufficient information and analysis to support the value conclusion is not accept- able as an evaluation. For example, a valuation method that provides a sales or list price, such as a broker price opinion, cannot be used as an
HISTORICAL REO SALES PRICE COMPARISON
MEDIAN SALES PRICE
AUTOMATED VALUATION MODELS (AVMS) Dodd-Frank defines the term “automated valuation model” (AVM) to mean “any computerized mod- el used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.” This language doesn’t prevent or limit the use of AVMs for principal residences while being silent on sec- ond homes and commercial property. In case the point is missed, Dodd-Frank also creates a huge AVM loophole in its definition of a “broker price opinion.” A BPO, says Dodd-Frank, is “an estimate prepared by a real estate
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broker, agent, or salesperson that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighbor- hood, and information on compara- ble sales, but does not include an automated valuation model.” Zillow reports that in the third quarter, “more than 186 million average monthly unique users ac- cessed Zillow Group brands' mobile apps and websites, an increase of 7 percent year-over-year.” What makes these huge and growing numbers remarkable is that in 2018, existing home sales de- clined, single-family housing starts were down, and mortgage rates were up. No less amazing, how do you get 186 million unique users to visit your sites when home sales for ONLINE HOME VALUE ESTIMATES
2018 only totaled about 6.2 million new and used units? The Zillow sites — which include both Zillow.com and Trulia.com — are just one part of the online real estate marketplace. There are oth- er substantial sites, including Yahoo! Homes, Realtor.com, Redfin.com, and Homes.com. Leading online property sites hold vast amounts of information. A visitor can find such things as a sale price, square footage, photos, price per square foot, past sale prices, past listing prices, the number of bedrooms, and tax costs. This ma- terial — market intelligence, really — is presented in a way that’s easy for site visitors to understand, the public side of complex automated valuation models (AVMs). The catch is that online valuations — no matter how beautifully pre- sented — can differ from each other. Go to several property sites and check the value for your home. Each estimate will likely be dif-
ferent, and the gap between the highest and lowest valuations can be significant.
“AVMs are the new fraud fron- tier,” said Joan Trice, Founder and CEO of Allterra Group. Allterra Group is the parent company of such well-known industry brands as the Appraisal Buzz website, Appraisal Buzz Magazine, Valuation Expo, and the Collateral Risk Net- work. “It is just assumed the AVM is superior. Everyone is infatuated with technology. We have lost all respect for experts. How would an AVM know about the 35 cats you have in your basement?” Property sites are careful to explain that an AVM is not a sub- stitute for an appraisal. Zillow, for example, states that its Zestimate “is not an appraisal. It is a starting point in determining a home's val- ue.” It advises site visitors to also obtain a comparative market anal- ysis (CMA) as well as an appraisal and to physically visit the property when possible. If it is true that an AVM is not an appraisal, it’s also true that home value estimates are typically free, instantly available, and constantly being updated. Online AVMs are being checked and rechecked by the public, not because people are necessarily in the market to buy or sell but because home values im- pact our ego and sense of financial success. Who doesn’t like to see the estimated price of their home, especially when prices are rising? Barriers such as price (there are none) and time (online valuations are available day and night) simply don’t exist with online systems. And – not that anyone would ever do this – you can easily and anon- ymously check the pricing of your manager’s house or how much Uncle Wally paid for his home. Conflict arises when homeowners see online AVMs as a benchmark which shows a higher value than an appraisal or CMA. It must then be ex- plained by appraisers, brokers, and lenders that no, the property is not
AVMs are the new fraud frontier. It is just assumed the AVM is superior. Everyone is infatuated with technology. We have lost all respect for experts. How would an AVM know about the 35 cats you have in your basement?”
Why does this happen?
• The variables and weights used in one model may differ from another. • The availability of recent prop- erty information can vary by jurisdiction. • A new subdivision with three models and lots of sales is easier to price than a neighborhood built 100 years ago where every home is different and sales are infrequent.
really worth as much as some sites might suggest, a conversation which is likely to be discomforting. “Consumers,” says the National Association of Realtors (NAR), “who are seriously in the home-buying and home-selling market should be mindful of a variety of compet- ing home price estimators. Solely relying on just one price estimate is likely to skew the views of what a particular property will actu- ally transact for. When it comes to online home value estimates, however, the number one caveat for consumers is that these estimates are not a substitute for formal ap- praisals, comparative market anal- yses, and the in-depth expertise of real estate professionals.” “AVMs are a misnomer,” explains Joan Trice, who is also the Founder and CEO of Clearbox, an appraiser credentials database used by lend- ers, regulators and AMCs. “They are not valuation models. They are sales price models. Who cares what the prices are? Fannie and Freddie should care about value, yet they have dismantled the appraisal pro- cess to a single approach to value, the Greater Fool Theory.”
claiming that appraisals for reverse mortgages – what HUD calls home equity conversion mortgages or HECMs – often do not offer suffi- cient accuracy. “During FY 2018,” said HUD, in its latest annual report to Congress, “FHA became aware of concerns with the accuracy of appraisals used to originate HECMs. A com- parison of over 80,000 HECMs endorsed between 2016 and 2018 strongly suggested that certain appraisals used in FHA’s HECM program were overvaluing the collateral and generating inflated property appraised values. Over this period, 21 percent of the population had an appraisal that was 10 percent or more above the automated valuation model (AVM) estimate. Over the same period, 9 percent of appraisals were inflated by 20 percent or more, and 4 per- cent of appraisals were inflated by more than 30 percent.” HUD has now begun to require two appraisals for selected HECM applications as a result of its find- ings, but the government’s claims are not without question. “It is worth noting that any losses the FHA is recording today are actually the result of transactions made years earlier, and in some cases many years earlier,” explains Larry M. Elkin, presi- dent of the Palisades Hudson Financial Group, an asset manager.
• One system may allow owner inputs while another does not.
• Online valuations can differ sig- nificantly from appraised values and marketing advice provided by real estate brokers.
2018 HOMES SALES BROKEN DOWN BY DECADE BUILT
MEDIAN SALES PRICE
2010-2020 2000-2010 1990-2000 1980-1990 1970-1980 1960-1970 1950-1960 1940-1950 1930-1940 1920-1930 1910-1920 1900-1910 1890-1900
WHAT ABOUT ACCURACY? How accurate are valuations, whether human or electronic? HUD, for one, has caused a stir by
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FEATURED ARTICLE: WILL AVMs CREATE A WORLD WITHOUT APPRAISERS?
FEWER APPRAISERS Between 2009 and 2017, existing home sales rose from 4.34 million units to 5.51 million units, a gain of 1,170,000 transactions, and yet the number of appraisers has declined. In 2009 there were 92,750 active real estate appraisers, according to the Appraisal Institute. By the end of 2017, the Institute estimates that the number of practitioners had
Elkin adds, "Blaming appraisers for losses on reverse mortgages is just another exercise in scapegoat- ing. The appraisal industry’s collec- tive role in any losses connected to these transactions is minimal compared to all the other risks involved. The FHA’s proclivity to blame the appraisers is an exercise in self-deception, or misdirection, or both.”
Data Portal) the number is around 45,000. If you look at the number of transactions, it comes to an aver- age of two appraisals per week. That is an oversupply of appraisers. “What makes the headlines,” she continued, “is the shortage in ‘bubblicious’ markets. Can we ever fulfill supply in bubbles? No, the supply isn’t that elastic. And the bigger question is should we?” FEES & AMCS Appraisals cost money at a time when the Internet is driving the price of information toward zero. The cost of a big bank residential appraisal is $500 or so according to ValuePenguin. That’s a big number for a lot of borrowers and a glaring contrast with electronic valuations, but in looking at appraisal costs, several points are often lost. First – and of huge importance – appraisers actually spend time at the property, go inside, and are local valuation experts. Borrowers are getting something for their money. Second, the appraiser’s job is to establish a property value, a value which may prevent buyers from paying too much and lenders from accepting too much risk. “In the typical real property trans- action, the appraiser is the only party with nothing to gain by closing the transaction,” says Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg, FL and a four-time chairman of the Florida Real Estate Appraisal Board. “Their role is to be competent, independent, impartial, and objective. Also, in a typical real property transaction, the appraiser provides the report of his opinions and conclusions to the lender to as- sist in the loan underwriting decision. “If the lender opts to make that decision without an appraisal,” Gregoire continued, “the borrow- er is still on the hook to repay the
fallen to 82,208, a loss of more than 10,000 professionals. “The average annual rate of decrease for the past five years has been approximately negative two percent,” said the Appraisal Insti- tute. “Broader analysis suggests that declines may continue for the next five-to-ten years due to retirements, fewer new people entering the ap- praisal profession, economic factors, government regulation, and greater use of data analysis technologies.” With less to sell, finance, and close, there’s no doubt that the housing crash caused people in many shelter-related fields to leave. But, in turn, with less activity are so many appraisers actually needed? Joan Trice explains, “We had a housing finance crisis that re- sulted in a dramatic decrease in transactions. It flushed out a lot of part-timers in all aspects of the housing economy. If you look at the number of appraisers who sub- mit to UCDP (Uniform Collateral
If the lender opts to make that decision without an appraisal...the borrower is still on the hook to repay the loan, regardless of the market value of the property. In some circumstances, wouldn’t a prudent buyer seek the unbiased opinion of a well-credentialed, experienced professional before committing to 30 years of payments? It might be money well spent.”
Blaming appraisers for losses on reverse mortgages is just another exercise in scapegoating. The appraisal industry’s collective role in any losses connected to these transactions is minimal compared to all the other risks involved. The FHA’s proclivity to blame the appraisers is an exercise in self- deception, or misdirection, or both.”
loan, regardless of the market value of the property. In some circumstances, wouldn’t a prudent buyer seek the unbiased opinion of a well-credentialed, experienced professional before committing to 30 years of payments? It might be money well spent.” Third, there can be a major dif- ference between what borrowers pay for appraisal services and what appraisers actually collect, a point that doesn’t get much attention. After the mortgage meltdown, federal and state governments wanted to make sure that apprais- ers could not be pressured by lend- ers to hit a certain number or curry favor with favorable valuations. One result was the Mortgage Disclosure Improvement Act (MDIA). The MDIA led to the establish- ment of appraisal management companies (AMCs). Instead of hiring appraisers directly, lenders can hire AMCs and have the AMCs hire appraisers, thus separating appraisers from loan officers and other mortgage officials. And, of course, for this service there’s a fee to the AMCs. Borrowers, for their part, often see an appraisal fee but not how the fee is divided. Without disclo- sure, consumers may believe the
entire fee is going to the appraiser. “AMCs often get more than 50 percent of the borrower’s applica- tion fee designated for the apprais- al,” says Jonathan J. Miller, Pres- ident and CEO of Miller Samuel, Inc., New York-based real estate appraisers and consultants. “I’ve seen as much as 70 percent go to the AMC,” said Miller (no relation to the author). “I’ve had appraisers tell me their AMC clients don’t allow the appraiser to place the breakdown of the fee on the report. Their lobby has pushed hard to keep that issue unclear to the consumer. Imagine if the consumer was aware that a large portion of the ‘appraisal fee’ was designated for clerical work. This one issue has decimated appraisers and caused many to leave the profession. “Think about that 50 percent to 70 percent share of the appraiser’s fee for a second,” Miller continued. “AMC’s must be the most inefficient financial institution ever invented since all they actually do is order re- ports via software, verify our certifi- cations, and claim they are a barrier between the appraiser and the bank. Trained appraisers are forced to work with 19-year-olds chewing gum who don’t really understand what we do. In my experience the AMC
LARRY M. ELKIN
HISTORICAL FHA SALES PRICE COMPARISON
MEDIAN SALES PRICE
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praisers have done a good job protecting their territory. To quote the Cowardly Lion, “not nobody!” can provide an appraisal except an appraiser. “Not nohow!” The rules protecting apprais- ers have helped defend their turf against encroachments by other professions. The emerging problem is not that another profession will offer “appraisals” but that the mar- ket will accept substitutes. Last spring, federal regulators adopted a new appraisal threshold for commercial mortgages. “The final rule,” said the Federal Regis- ter notice, “increases the threshold level at or below which appraisals are not required for commercial real estate transactions from $250,000 to $500,000. “For commercial real estate trans- actions exempted from the apprais- al requirement as a result of the revised threshold,” said the notice, “regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.” Under the higher threshold, gov-
process adds at least a week onto the turnaround time. AMCs shop for the cheapest fee and that may take three to four days. Yet the industry is so concerned about turnaround time that they expect us to complete a credible report in 24 to 48 hours. “There has never been a shortage of appraisers,” added Miller. “There is only a shortage of appraisers willing and able to work for 50 per- cent of the market rate.” “There is anecdotal evidence of some AMCs taking 50 percent or more of the fee charged to the borrower,” says Gregoire, who has also been a past chairman of the National Association of Realtors Appraisal Committee. “Rarely is the borrower aware of the arrange- ment between the lender and the AMC. Even more rare are situations where the borrower is informed of the percentage of the ‘appraisal fee’ retained by the Appraisal Man- agement Company.”
AMC’s must be the most inefficient financial institution ever invented since all they actually do is order reports via software, verify our certifications, and claim they are a barrier between the appraiser and the bank. Trained appraisers are forced to work with 19-year-olds chewing gum who don’t really understand what we do."
HISTORICAL MEDIA SALES PRICE BY QUARTER
ernment regulators estimated that almost 32 percent of all commer- cial transactions will be impacted by the new rule. However, seen
THE COMMERCIAL MODEL So far it would seem that ap-
2018 SALES PRICE COMPARISON
MEDIAN SALES PRICE
another way, less than two percent of all commercial transactions by dollar value will be exempted by the new appraisal requirement. Of course, while the need for
THE PUSH TO $400,000 In late 2018, government regula- tors proposed raising the residential appraisal threshold to $400,000, up from $250,000, a figure established
appraisals declines under the new commercial standard, the demand for “evaluations” can be expected to increase. This is the opportunity for AVMs.
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FEATURED ARTICLE: WILL AVMs CREATE A WORLD WITHOUT APPRAISERS?
This policy will protect upper-brack- et borrowers with deeper pockets against overpaying while pushing entry-level and median-income bor- rowers away from such valuations. Fewer burdens for banks sounds attractive, but how much relief do banks need? FDIC-insured insti- tutions reported $62 billion in net income in third quarter, up 29.3 percent from a year earlier. While it’s great that federal reg- ulators are looking out for banks, who is looking out for borrowers? If a bank over-lends for one prop- erty out of a hundred it’s not a big deal, but for residential borrowers the situation is different. They’re only buying one property. If buyers overpay they can face a major loss. There are no other properties in the picture to offset their risk. “Appraisers should be protected by the prudential regulators,” said Trice. “Instead they are under as- sault. It cannot end well when you remove the only independent third party who is unbiased.” There’s an oddity with progress. The results we get are sometimes not the results we expect. We live in the computer era and yet we still use a lot of paper, about 10,000 pages per year for the typical office worker. In a similar sense, AVMs are here to stay. Their use will increase. This is a natural progres- sion to expect in the Internet age. But AVM growth does not mean appraisals will disappear. There’s a need for physical, on-site, indepen- dent valuations by trained apprais- ers. There’s a place today for both AVMs and appraisals. And there will be tomorrow. Peter G. Miller is a nationally-syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.
in 1994. If adopted, “an additional 214,000 residential real estate loans originated by FDIC-insured institu- tions or affiliated institutions” would no longer require appraisals. Of course, many residential mortgages are originated by organizations not insured by the FDIC. Also, these 214,000 properties are above the 750,000 already exempted from an appraisal requirement under the $250,000 minimum. “The regulators have lost their collective minds,” Trice told the Housing News Report. “And they propose this under the guise of ‘safety and soundness.’ It feels so 2005-ish. I hope Michael Lewis has already started his next book. This next crisis is going to be a collat- eral crisis, not a credit crunch. Collateral matters.” In the context of residential prop- erty, the proposed threshold would be significantly above the typical
prices paid by consumers. For instance, in Q4 2018 the median ex- isting home sale price was $245,000 according to ATTOM Data Solutions. For new homes, the government reported that the median price was $309,700 in October. As with the new commercial threshold, fewer required residential appraisals would open the doors for alternatives. As the proposal states, “Evaluations would continue to be required for transactions exempt under the increased threshold.” “This increase in the number of loans that would no longer require appraisals would provide meaningful burden reduction for regulated in- stitutions,” explains the Office of the Comptroller of the Currency (OCC). And yet, curiously, if there’s a $400,000 minimum threshold for residential appraisals it means that independent evaluations will be required for more expensive homes.
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Talented Tech: Alternative Valuation Solutions Give Lenders More Flexibility in 2019
ically find the best path to an ac- curate valuation for any particular scenario by training itself on Clear Capital’s unique data set.” An AVM built by economists or statisticians without much valu- ation expertise — the “stats-only approach” — may result in a model that is less accurate and much less scalable, since the intricacies in each market must be identified,
built into the AVM, and updated manually, often involving years of research and fine tuning. An AVM built by computer scientists with valuation expertise — the “ma- chine-learning approach” — results in an incredibly accurate model that is also quickly scalable, since the AVM can teach itself the intricacies from the market level down to the property level, build them into the AVM, and keep them updated auto- matically, in near-real time. “Our ClearAVM customers bene- fit from unprecedented quality, cov- erage, and confidence,” said Clear Capital CEO Duane Andrews. “The real beauty of the machine-learn- ing approach is that our model can automatically look outside of a typ- ical search radius and train itself to consider variables that may add the most value, like a property’s view. It’s constantly adjusting, even as we speak. The future is very exciting.” Clear Capital was able to build
Our ClearAVM customers benefit from unprecedented quality, coverage, and confidence."
BY KENON CHEN
A utomated valuation models (AVMs) are effective property valuation tools. But they’re kind of like magic — enter an address, and an estimated value appears. For consumers, that simplicity is perfect. However, for financial in- stitutions that use AVMs for lending decisions, quality control, or other situations that carry risk, the me- chanics behind that simplicity must be well understood. Although lenders and regulators still approach them with (justifi-
able) caution, AVMs are gaining popularity as an effective and trustworthy solution for more and more situations. An AVM, especially when combined with a property inspection, can be an effective val- uation tool for home equity lending. An AVM can provide a quick and cost-effective way to value a pool of loans in a portfolio. An AVM can serve as an effective quality control tool or provide a quick, pre-valua- tion “gut check.” And, an AVM can make collateral review and under-
writing processes more efficient. Clear Capital recently announced a major addition to its analytics solutions with ClearAVM, a lend- ing-grade automated valuation model (AVM) powered by an ad- vanced machine-learning engine. “With rapid advancements in machine-learning capabilities, we saw an opportunity to bring AVM accuracy to a new level,” said Clear Capital President Kevin Marshall. “By embracing machine-learning, ClearAVM can quickly and automat-
a lending-grade AVM from the ground up because of its ad- vancements in data processing, machine learning, and nearly 20 years of property valuation lead- ership. ClearAVM rounds out Clear Capital’s ability to offer solutions that best fit the valuation scenar- io and property, especially when combined with its other analytics solutions and network of apprais- ers and real estate professionals who offer in-the-field valuation and
With rapid advancements in machine- learning capabilities, we saw an opportunity to bring AVM accuracy to a new level.”
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TALENTED TECH: ALTERNATIVE VALUATION SOLUTIONS GIVE LENDERS MORE FLEXIBILITY IN 2019
customers the most effective valua- tion solution for any given scenario. A ClearVal appraisal includes an inspection by a local, licensed real estate professional and a desktop valuation by a local, licensed ap- praiser from Clear Capital’s na- tionwide network. Appraisers have access to ClearProp, Clear Capital’s robust property research tool (which includes ClearAVM!) and allows us- ers to view comparable properties side-by-side, analyze home price trends, view MLS photos, read MLS commentary, and more. ClearVal appraisals are packaged in a consumer-friendly PDF report, so everyone — from underwrit- ers to loan officers to first-time borrowers — can easily understand the information. For every alternative valuation solution, financial institutions should be sure their valuations provider understands the impor- tance of compliance. For example, the ClearVal appraisal was designed to meet the compliance standards of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the Interagency Appraisal and Evaluation Guidelines, and the Uniform Standards of Professional Appraisal Practice (USPAP). And, in addition to automated quality checks, every ClearVal appraisal is reviewed by a highly-trained, U.S.-based analyst, and no work on a ClearVal appraisal is ever out- sourced to another country. In 2019 and beyond, as the indus- try sees an increase in HELOC vol- ume and financial institutions look for even more ways to delight their borrowers, alternative valuation solutions like AVMs and hybrid ap- praisals will offer more flexibility, less costs, and quicker turn times while still delivering on confidence and reliability. Kenon Chen is the Executive Vice President of Strategic Partnerships at Clear Capital.
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inspection expertise. Like all of Clear Capital’s solu- tions, ClearAVM is powered by the company’s continually updating database of information on nearly every U.S. property, including data from public records, the company’s proprietary data, and an ethical- ly-sourced, high-coverage multiple listing service (MLS) data set. It’s true that AVMs are quicker, cheaper, and more readily available than appraisals. But it’s important to note that even the best AVM can only provide an estimate of value based on known factors. AVMs have difficulty considering things that negatively impact value (like messy neighbors or noise pollution) and positively impact value (like kitchen remodels or add-ons). An AVM is not always suitable for lending de- cisions, and not every property can be valued with an AVM. Another important note: AVMs won’t be replacing appraisers anytime soon. In fact, the best AVMs use machine-learning to try and “think” like appraisers — their models are programmed to emulate the way a trained expert would approach a valuation, which
highlights the immense value and necessity of appraisers and the appraisal profession. In addition to AVMs, financial institutions have other, alternative valuation solutions to consider. Hybrid appraisals are designed for medium-risk valuation situations that don’t require a traditional appraisal — including home equity lines of credit (HELOC), loan sale due diligence, and non-qualified mortgages (non-QM) — but call for a more robust solution than an AVM or broker price opinion (BPO). Clear Capital recently announced the next generation of its ClearVal appraisal, a hybrid appraisal that combines a boots-on-the-ground inspection with a local, apprais- er-completed desktop valuation. Financial institutions need a valu- ation solution that takes less time to complete than a traditional apprais- al while also excelling in four areas: dependability, compliance, cost-ef- fectiveness, and nationwide avail- ability. The ClearVal appraisal was designed hand-in-hand with some of the nation’s top lenders to be that solution, and further enhances Clear Capital’s ability to offer its
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20 think realty housing news report
march 2019 21
2016 2017 2018
PERCENT CHANGE SINCE BOTTOM
Las Vegas- Henderson- Paradise, Nevada
San Diego- Carlsbad, California
Los Angeles- Long Beach-
San Franciso- Oakland- Hayward, California
Seattle- Tacoma- Bellevue, Washington
San Jose- Sunnyvale- Santa Clara, California
Boise City, Idaho
fornia; and Seattle. But in all five of these markets, the rate of home price appreci- ation in November 2018 slowed compared to a year ago, a possible sign of a cooldown. Housing News Report asked local experts and investors from each of these mar- kets whether they see signs of a potential cooling off period for local home prices in the near future or if
they expect the hot housing market to continue.
People are not depending on refinancing to pay their mortgage like they were a decade ago. The housing market is behaving the way it should behave and we all should be happy for that.”
Is the West In For Another Wild Ride?
STILL BOOMING IN BOISE Topping the Forbes list of “Ameri- ca’s Fastest Growing Cities 2018,” the Boise City metro area of Idaho known as the “Treasure Valley” has contin- ued to see home sales prices trending upwards since January 2012.
BY JOEL CONE TAMER TRENDS EMERGING IN WILD WEST HOUSING MARKETS
R eal estate can be a wild roller coaster ride over time. However, by its nature, real estate is local. So depending on location, some markets can experience trends resulting in a more volatile ride than other parts of the country. This is particularly true in parts of the Western states, where home sales prices took a nosedive when the Great Recession hit in 2007 be- fore returning to some normalcy in 2012, beginning yet another steady climb year-over-year since then. “We had a huge spike in inven- tory right into the teeth of the collapse,” noted Chris Thornberg, Founding Partner of Beacon Eco- nomics. “I would argue that the
market has been behaving quite reasonably. There are no spikes now in inventories, which is a mark of a downturn. The months’ supply is still tight at the national level.” Unlike the last downturn, there are no subprime loans, and mort- gage lenders have improved their lending standards. Plus, there are not so many desperate sellers or people who find themselves underwater with their mortgage," Thornberg added. Because indicators that led to the Great Recession are not in play this time around, Thornberg does not believe another recession is on the horizon anytime soon. “If you don’t have a why then you
don’t talk about when,” said Thorn- berg, who is also Director of the UC Riverside School of Business Center for Economic Forecasting. “People are not depending on refi- nancing to pay their mortgage like they were a decade ago. The hous- ing market is behaving the way it should behave and we all should be happy for that.” Analysis of median home sales data from ATTOM Data Solutions revealed five western markets that stand out when it came to steep upward climbs in median home prices since the bottom of home prices in 2012: Boise, Idaho; Las Vegas, Nevada; coastal Northern California; coastal Southern Cali-
NOV 2018 VS NOV 2017 HOME PRICE APPRECIATION
Las Vegas-Henderson-Paradise, NV
San Diego-Carlsbad, CA
Los Angeles-Long Beach-Anaheim, CA
San Francisco-Oakland-Hayward, CA
Boise City, ID
San Jose-Sunnyvale-Santa Clara, CA
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MARKET SPOTLIGHT: WESTERN HOT SPOTS
down payment, on the other hand, was 49.4 percent of wages in Ada County and 47.7 percent in Canyon County. As a result, whatever deals investors find are off-market, ac- cording to Brown. “You have to be connected to find off-market properties,” he said. Deals that are put out to the mass- es, such as on the MLS, are gobbled up quickly. Given current market conditions Brown does not believe there’s enough margin in most deals to warrant flipping properties. “I get two or three calls a week from guys looking to buy B and C-class properties and want to turn them into A-class properties. That’s been done. They’re about five years too late,” Brown said. LAS VEGAS SLOWDOWN IN THE CARDS Las Vegas ranked the sixth fastest-growing city in America last year, according to Forbes. But despite projections of continued population growth and an unem-
ployment rate that was down to 4.4 percent in November 2018, Las Vegas is still in recovery mode. “We took a huge hit after the Great Recession, down over 50 percent in lost values,” said UNLV Economics Professor Stephen M. Miller. “After the recession we were at the bottom of the heap. We’re still trying to catch up.” ATTOM reported that the median sales price bottomed out for the Ve- gas metro area in April 2012 and has not gone negative thereafter. Since March 2017, the metro area has seen double-digit yearly increases in median sales prices. As of November 2018, the median home price was up 12.5 percent from November 2018. Still, Miller believes the market affordability — which has seen large declines since Q3 2016 — is playing a major factor in the mar- ket’s slight slowdown. “It is slowing down a bit here. It’s not a bad thing,” said Miller. “Affordability is on a downward trend and that’s what you expect when prices go up.” Investor Travis Schurr believes a
metro area, Brown knows there is not enough housing to meet demand, and the lack of inventory is causing prices to go up, pushing potential home buyers out of the market and into rental housing. “From an investor’s standpoint it’s wonderful. I don’t see it cooling off,” he said. “The good news is rents continue to increase and prices continue to increase. We’ve seen investors who, in the past have been okay with purchasing at certain cap rates. As things get more expensive, those caps go lower and lower.” Rents in both Ada and Canyon coun- ties — the primary counties compris- ing the Boise metro area — will rise 2 percent in 2019 to $1,317 a month for a three-bedroom, single-family home, according to an ATTOM analysis of rental data from the U.S. Department of Housing and Urban Development. Average wage earners in Ada County in 2019 would need to spend 33.0 per- cent of income to rent, while in Canyon County it is 43.9 percent of the average wage to rent. Affordability to buy a median-priced home with a 3 percent
BOISE CITY, ID HISTORIC HOME SALES
MEDIAN SALES PRICE
YEAR-OVER-YEAR HOME PRICE APPRECIATION
“It’s a interesting market. De- mand is always there,” said Mike Brown, owner of the Mike Brown Group at Silvercreek Realty Group based in the Boise area. “It seems to be quality of life for the most part. That’s why we’re attracting people who are relocating.” According to ATTOM, since the market in Boise turned around in the beginning of 2012, the year- over-year growth in median sales prices have only gone negative once, in June 2014. Otherwise the metro area has seen long periods of both single and double-digit yearly price appreciation through November 2018, when median home prices were up 11.7 percent. “The housing market isn’t likely to soften in 2019. The prices will still be rising by the end of 2019,” said Donald W. Holley, emeritus faculty in the Department of Eco- nomics at Boise State University .
“It’s got to cool off sometime. As we look ahead, the consensus is someday we’re going to have a recession, but not this year.” Inventory of new housing peaked for the area in 2006, while existing home inventory peaked from 2007 to 2008, explained Holley, who noted that overall inventory declined dra- matically from 2016 through 2018. “By 2016, the inventory of existing homes was less than the inventory of new homes. The reason, apparently,
is that Idaho is the fastest-growing state. It’s much easier to sell a home in today’s market than it was five or six years ago,” he said. The trends are also showing that the median home prices and the days-on-market for new and exist- ing homes have tracked each other fairly closely over time between 2006 and 2018. “Things are moving up. The ques- tion is when will it stop?” Holley said. As a long-time investor in the
LAS VEGAS-HENDERSON-PARADISE, NV HISTORIC HOME SALES
MEDIAN SALES PRICE
YEAR-OVER-YEAR HOME PRICE APPRECIATION
The housing market isn’t likely to soften in 2019. The prices will still be rising by the end of 2019.”
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