I started 2018 as the recently installed president of the Maine Chapter of the Appraisal Institute. Throughout this past year, I significantly benefited from the efforts, insight and experiences of the chapter officers and directors. Please allow me this opportunity to thank them for their efforts, for this chapter would not have had the year we did without them. I again encourage appraisers who are looking to elevate themselves in this profession to participate in the Appraisal Institute or other similar, professional organizations. I also wish to thank my staff at Dirigo Valuation for their hard work, commitment and level of professionalism that directly contributes to our collective success this past year.
For most residential appraisers in the southerly part of Maine, 2018 has been a challenging, but overall successful year. Continued low interest rates and steady purchase demand activity resulted in strong demand for our services. This environment continued with only minor fluctuations well into the fourth quarter, when increasing interest rates and more traditional “seasonal” demand and market activity factors started to be experienced.
Purchase Activity: Multiple purchase contracts for even “ordinary” properties are common-place. The term “escalation clause” became more frequently experienced in the area. For those of us who were appraising in the mid 2000’s, it appeared to be deja-vu all over again. Much of the observed purchase activity was bifurcated: Either cash or high loan to value. There appeared to be limited 50%-80% LTV activity, which is somewhat of an historic shift. Downtown Portland’s condominium market exhibited continued strong demand, even with an increase in the completion of new developments. Additionally, apartment building to condominium conversions also continued at a steady pace. This conversion process also presented highest and best use challenges when appraising these apartment buildings, for it is imperative to provide a discussion related to these sub-segment dynamics. It’s likely that these dynamics are present in other New England communities. Staying on top of this segment’s supply / demand dynamics will likely prove to be challenging over the next few years.
New Construction: Limited new subdivision approval from prior years, likely a hang-over from the Great Recession, has resulted in limited supply or availability of residential building lots. Municipalities are often requiring a greater level of infrastructure for subdivision development (open spaces/buffer zones, etc.). While generally deemed beneficial, it does tend to increase development and ultimately retail costs. Material costs have also experienced significant fluctuations. Recent natural disasters (hurricanes, etc.), trade-war/tariffs and similar practices have led to increased construction costs. The “typical” cost services employed by residential appraisers may be challenged to maintain these dynamics, and it is essential that we are sensitive to these forces. Many larger builders (which in this area, are those that build more than 20 homes / year) report four to 12-month lead-time from contract to completion. This is related to a combination of limited labor availability / capacity and materials supply.
Refinance Activity: The year started with the continuation of a very favorable interest rate environment. This afforded those who hadn’t previously taken advantage of these low interest rates an opportunity to do so. Additionally, many areas continued to experience modest valuation gains which allowed for more “cash-out” options. This also applies, to a lesser extent, for “equity” valuation assignments where an owner may be reluctant to trade their very low first mortgage interest rate and instead utilize a home equity / second mortgage option.
Appraiser Environment: The Appraisal Qualifications Board (AQB) issued new licensure and certification requirements. These changes became effective on 5/1/2018, but it is up to each individual state to adopt (either in whole or in-part) these new requirements. Maine currently requires legislative action to adopt any of these changes. It is anticipated that Maine’s legislature will act later this spring.
Trainee requirements remain largely unchanged. Upgrading to a licensed appraiser requires the same level of education/courses as before, but the number of appraisal “hours” has been halved from 2,000 to 1,000 hours in no less than six months. I am personally not in favor of such a shortened time frame. I have trained seven appraisers over the past 10 years. One left the field shortly before completing the trainee period, one left the appraisal field about two years after becoming licensed and the others are successfully practicing appraisers. Additionally, I currently have one trainee. A common theme in their respective development is that a considerable increase in ability, understanding and competency typically occurs somewhere around 1,200 to 1,500 hours. So, ideally, I’d like to see something in this range rather than the shorter time frame. The additional hours between 1,500 and 2,000 proved to be only marginally beneficial to the trainee. The changes to upgrade to certified residential have resulted in more flexibility regarding college courses, a decrease to 1,500 appraisal hours and additional appraiser related course-work and / or minimum of 5 years of appraisal practice experience. Changes to certified general have eliminated the time requirement to complete the non-residential appraisal work, which remains at 1,500 hours as well as still requiring a bachelor’s degree. It is hoped that by decreasing the trainee time commitment and increasing the educational requirement flexibility, the barriers to entry will diminish and result in more appraisers.
Challenges: The appraisal profession is facing increasing pressures from multiple directions. There is increasing demand for and use of “evaluations” for low risk loans (both commercial and residential); “data” mining of residential appraisals will likely improve the confidence scores for AVM’s and related tools. Hybrid and / or bifurcated appraisals, where the property is inspected by a non-appraiser and said inspection results are communicated to the appraiser for a desk-top report will likely become more common as well. The appraisal profession is “graying.” Per the Appraisal Institute, the estimated number of appraisers has declined from approximately 100,038 in 2010 to 80,778 (9/2018), or -19.25%. We need to do a better job of replacing ourselves in addition to increasing the profession’s relevancy. This can be achieved by being willing to hire and train the next generation of appraisers as well as improving our skills to provide that value-added service beyond what an algorithm may provide.
Managing client “turn-time” expectations is a constant challenge. In an environment where one can apply for a mortgage on the “phone,” many lenders are trying to provide a very streamlined and time shortened process. The above cited products have been created, in-part, to assist in this, as well as cut costs.
As appraisers, it is incumbent on us to be sensitive to these challenges and expectations. Sometimes, a “full” appraisal is over-kill. Sometimes, it’s quite relevant and necessary.
Opportunities: It is increasingly easier to utilize analytical tools and incorporate them into our appraisal process. Those same algorithms that may erode some types of business also allows us to improve the content and quality of our appraisals. Don’t be afraid to adapt! Based on the number of inquiries we receive, there appears to be steady to increased interest to enter the industry. Some inquiries come from realtors who are looking to stay in the real estate industry but in a different way, others are looking to start a second career and others looking to start their work-life. While there are challenges, I’m cautiously optimistic.
Outlook: I anticipate that 2019 will result in decreased, but steady residential appraisal activity when compared to 2017 & 2018. The generally upward trend in interest rates combined with the cyclical nature (pause) of real estate are influencing factors. Historically low unemployment rates have also been significant to recent activity.
Russell Barrows, SRA, is president/chief appraiser of Dirigo Valuation, Inc., Portland, ME.