Effective April 1, 2009, mostly in response to past lending problems, Fannie Mae and Freddie Mac both enacted new rules and requirements, one of which is a new form that appraisers must include as an appraisal addendum. This form, among other requirements, has areas to include aborption rate comparisons for various time periods. The Freddie Mac Form 71 and the Fannie Mae 1004MC both consider three variables to be important to the future well-being of the loan:
- Trend in absorption rate over time.
- Days on Market trend over time.
- Time period comparisons for current listing inventory.
Actually, they are all related and intertwined. Here's an example of calculating absorption rate:
1. Take the number of properties sold and settled over a specific period. Let's use six months for this example, and in that period, 120 properties sold and settled.
2. Dividing 120 by the 6 months, we get a sale rate of 20 homes per month.
3. If the current listing inventory shows 700 homes actively being marketed, we divide that by 20 to get a 35 month supply of homes on the market.
That's the absorption rate, and it changes with market conditions both nationally and locally. There are also seasonal trends that the appraiser must take into account. The Freddie Mac form has this measurement taken for three time periods:
- The immediate preceeding three months.
- Four to six months in the past.
- Seven to twelve months in the past.
It is hoped that watching the trend in the absorption rate for these three time periods will provide advanced clues as to the direction of the local housing market. If the rate is declining, sales are slowing, and the appraiser is tasked to determine whether absorption rates are stable, declining or increasing. Using this information, the value of the home can be impacted significantly.
As a real estate investor, learn how this works, and make a friend of an appraiser who can help you to keep up with these numbers. Also, days on market and inventory that are increasing are a warning sign for the near term values of area homes. Keep in mind that the appraiser must do these numbers for the comparable homes in the immediate area, not the entire area as a whole. Some areas may be in better or worse shape than the overall market.
