[This post was written for our REO servicing friends, although all are welcome to participate.]
The best and brightest financial minds are making educated guesses about what’s going to happen with the housing market, but they are guesses nonetheless. Government intervention, shadow inventory, and mortgage rates are a few of the big variables, and posturing for the 2012 election will certainly add to the fun. We don’t claim to have a crystal ball (well, not for real anyway). However it goes down, REOs are going to be a significant part of the housing market for the foreseeable future.
Broker price opinions are the backbone of property valuations in the REO world. You know the routine: three active comps, three closed comps, a listing sheet from the MLS, and a few photos of the property. A hundred dollars and a few days later, you have two BPOs in your hands and you’re making a valuation decision on the subject property. Perfect, right?
Not so fast.
The problem with using only BPOs to value properties is the age of the comps. If you’re looking at two BPOs and the most recent sold comps are three to six months old, how useful is that information? A better question might be, “Is the market today identical to the market on January 15th? How about October of 2010?”
The charts below illustrate the difference a few months can make. In Denver, the average market time right now is about five months. The black line shows the median price trend and the orange line shows the days on market trend.
Here’s another one from Portland, where the average market time is almost six months.
And Chicago, holding steady around seven months.
The closed transaction data reflect prices that were negotiated months ago, using different comps, with a different set of market variables. If your job is to know the value of properties, lagging data doesn’t tell you the whole story. Closed comps are useful, but only when you can compare them to how the market is behaving today.
This is like the difference between going to the library and searching for an answer on Google. Both are useful, but for different purposes. You’re not going to get today’s news in an encyclopedia.
How are you feeling about those BPOs now?
Jon Sterling is the Director of Marketing at Altos Research and the oldest of three children, hence the antagonistic tone of his writing. You can find Jon on Facebook, Twitter, LinkedIn or jon (at) altosresearch (dot) com.