Alvin “Chip” Wagner III, SRA, IFA, SCRP is third generation appraiser from Chicagoland who is a public figure and well respected within the appraisal industry. He runs the firm [A.L. Wagner Appraisal Group.](, which has been providing appraisal, consulting and research services throughout the Chicagoland market for more than 35 years. I met Chip through [RAC (Relocation Appraisers & Consultants)]( and have learned a lot from him. Like me, he has an enthusiasm for market analysis. Its great to have him share his insight on Soapbox.

This week, Chip talks about appraising in declining markets and the usefulness of understanding what competing properties are doing.
…Jonathan Miller

In this ever changing real estate market, I seem to be noticing new dynamics in the marketplace all the time. Almost daily, another little light goes on in my brain.

I have been doing this full time for 18 years, plus a few more years during high school and college while working in the family business, and I have never seen a market even close to this. A few of us have, but a majority of us have not.

I’ve appraised in a declining market, but most of the time, it was short-lived. Or it may have been a specific sub-market with unique influences leading to the decline (such as upper priced housing, or the influence of new construction in a marketplace).

But the most interesting “dynamic” I am noticing at the current time, is the lack of “good” comparables for use in my appraisals to estimate market value.

Unlike the Jonathan Miller’s Manhattan real estate market, the Chicago real estate market like most other areas of the country is in a period of decline. Fortunately, the Chicago area appears to be holding up better than some markets around the country. As a student of statistics, I am finding that macroeconomic statistics in most areas of Northeastern Illinois are showing declines. Sporadic sub-markets continue to hold up, but these areas are becoming fewer and fewer.


The local and national media and real estate community continues to talk about the increasing inventory, focusing on the total number of listings that are competing for buyers in the market place. It is true that in the Chicago metropolitan area (which encompasses over 9 million people) that the number of detached home listings has nearly doubled in the past two years (from 30,991 on 10/1/05, to 60,668 on 10/1/07) and most reports are focusing on this upward trend.

But the interesting dynamic also contributing to the inventory levels is the decline in sales volume. The annualized sales volume (12-month period) as of 10/1/05 was 83,757 sales of detached homes, and as of 10/1/07 it had shrunk to 59,626 sales.

While this is only a 29% decline in sales volume, the active listings increased a whopping 96%. The continued downward trend in contracts pending continues to force the sales volume lower each month and quarter it is calculated.

As a result, the challenge of the appraiser is that nearly 1/3 of the comparable sales have been removed from the pool of sales data for consideration. And in the volatile market with increased number of foreclosures, there is a wider range of values for these sales, than we had in previous markets. This is because of the foreclosure, pre-foreclosure and some corporate relocation sales that are now infiltrating the sales data pool with “lower” sales prices.

As they say, the cream rises to the top. And in the housing market, the few homes that are selling are the “crème puffs” out there. These homes still seem to be getting top dollar as a buyer can be choosy and select that home in perfect condition with fewest physical, functional and external defects.

These two dynamics are stretching what would be a small range of values in a “tract” housing neighborhood just two years ago, to a very wide range of values in today’s marketplace.


Fannie Mae guidelines ask mortgage appraisers to utilize comparable sales within the past 6 months. In other appraisals, the appraiser selects the most comparable sales, regardless of how recently they sold. In relocation appraising, the appraiser is given the latitude to select the “best” comparables, without limitations on when the most recent occurred.

In the April 2001 article published in Worldwide ERC’s Mobility Magazine titled The Difference Between Relocation Appraisals and Other Types of Appraisals, the author (yours truly) wrote:

>The relocation appraisal asks the appraiser to consider closed sales without limitation. Often, the best sale to compare the subject property to is a home that is the same model, located on the same street, that closed longer than 13 months ago, and that was personally inspected by the appraiser who is using the comparable.

The premise behind this statement at the time I wrote the article in 2001, was that one of the easiest adjustments for an appraiser to make and support is a market change/time adjustment.

After experiencing these declining market trends over the past two years, combining my training and experience with networking with my peer real estate professionals, I have now become a very big believer in utilizing the most recent data available.

Two years ago, I would have suggested that the appraiser utilize the comparable sale of the same model that occurred 10 months ago and that looking in the rear view mirror, it is easy to see the stable, increasing or decreasing market trend, leading to a market change adjustment.

But today, with the limited sales data in many markets (plenty of competing listings data by the way) and the wide range of values in that limited data pool, I strongly believe and urge real estate professionals to consider the most recent market data, and seek out that data in competing areas if the data does not exist or is extremely limited or dated in the immediate marketplace.

But how do we know where to go? This can be best explained as “profiling the buyer” a strength of real estate agents and brokers working in a specific marketplace. They realize a buyer comes into an area focusing on specific demographics and price ranges, not on the “XYZ” subdivision. The appraiser values the property based on what is going on in the XYZ subdivision, not what is going on based upon demographics and the price range.

The real estate professional needs to understand the dynamic of market change, and the importance of understanding what is happening with the most recent sales whether they exist in the immediate neighborhood, or if you must venture to nearby similar areas.


A final thought, the savvy real estate appraiser understands the importance of the competing listings and their impact on the market value of a given property. Why would someone pay more for the subject property than what a competing property is priced at? Sound familiar? It should. This is our real estate Principle of Substitution1.

With twice as many homes on the market which is supply, combined with the declining demand (falling contract pending and sales volume) the extra pressure eventually leads to declining values.

Spend time to analyze the active listings and select the most comparable one. Then add that listing to the sales comparison grid as a fourth or fifth sale in your appraisals. You might be surprised when those listings are adjusting lower than your sales. Why? Your market is declining.

1 Principle of Substitution states: that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the sales comparison approach is based.