DataQuick's Guide to Best Practices in Analyzing Local Real Estate Markets

7/29/2019 DataQuick's Guide to Best Practices in Analyzing Local Real Estate Markets

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Analyzing Local Markets

Transforming Information into Intelligence

DataQuick

[email protected]

1-888-299-8787

www.dataquick.com

Best Practices for Driving Higher Quality

Lending, Portfolio Management, and

Investment Decisions


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Transforming Information into Intelligencewww.dataquick.com Copyright 2013 DataQuick2

Overview

Te local market actors impacting real estate lending, servicing, andinvestment decisions are growing in number and complexity. And givenincreased regulatory requirements and internal scrutiny, the need to

incorporate a comprehensive view on how market conditions impacta property, its value, and the borrower is more important than ever.Unortunately, given increased complexity, its also more dicult thanever to gain the necessary comprehensive view o market drivers.

Tis guide addresses the key questions you must ask to understand themost important market drivers. More importantly, it details answersto these questions that leverage new, innovative tools to deliver theintelligence you need to make the right decisions.

Introduction Page 2

Best Practice #1 Page 3





Conclusion Page 11

Contents


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Are property values recovering in the market?

Tats a deceptively simple question.

On the surace, you can look at a county and make the type o assessment illustrated in Figure 1 with Maricopa County,AZ. Property values have accelerated over the past year and would seem to be poised or more growth. So, is the answer tothis rst question Yes.

Unortunately, its not that easy. When you dig deeper using a more granular HPI, and look at more localized price trendsin Maricopa County (Figure 2) you can answer the question Yes, but you can also answer No and Maybe. Zipcodes,like85301and85029,wherepropertyvaluesarestillappreciating,appeartostillbeinarecoverymode.

Property values here may still be underpriced.

Inzipcodes,like85007,wherepropertyvaluesaredecreasing,therecoveryeitherhasntstarted,isstalled,orperhapseven over. Zipcodes,like85837and85008,wherepropertyvaluetrendsareunevenwouldbeputinthemaybebucket.

Figure 2

Home Price Index: Select Zip Codes

HPI

Feb02

Feb03

Feb05

Feb07

Feb09

Feb11

Feb12

Feb04

Feb06

Feb08

Feb10

50

70

110

150

190

210

170

130

90

85007

85008

8501785029

85248

85301

85375

85387

Figure 1Home Price Index: Maricopa County, AZ

HPI

Nov02

Nov03

Nov05

Nov07

Nov09

Nov11

Nov04

Nov06

Nov08

Nov10

90

110

150

190

230

210

170

130

Source: Case-Shiller HPI

Source: DataQuick Neighborhood Level HPI


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Figure3putsallofthisintoperspective.

ewidedistributionofzip-levelpriceappreciationchangesillustratesthatPhoenixlikeallmajorgeographiesis comprised o multiple local markets. Any market analysis must consider valuation trends (and any trend or thatmatter) at the local level to be meaningul.

espikesinthegraphalsosuggestthatwhiletherearemanylocalmarkets,youcanclustermultiplezipcodesintothe same growth segments. Segmenting geographies like this allows greater exibility when youre trying to establisha propertys value via comparisons to comparable properties. Your basis or comparison expands because you canmake comparisons not only within a zip code but between two similarly behaving zip codes.

Figure 3

Zip-level Price Appreciation Distribution - Phoenix


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What types of properties are showing the most/least robust

appreciation?


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How is the supply of available inventory impacting property

values? What demand factors are having the greatest inuence on

market trends and property values?

Tis supply question used to be simple. rack listings over time to understand how the inventory o available properties

was changing in relation to market orces, property values, and demand. But with the collapse o the market andsubsequentproliferationofdistressedproperties,thisbecameamuchmorecomplicated,multi-facetedproblem.

Figures4-8highlightthemanycomponentsthatmustbeconsideredbeforeaneducatedanswercanbedelivered.egraphs very much present a good news/bad news scenario or Phoenix.

egoodnewsinPhoenixismonthlyforeclosurelingsandREOinventoryhaveseensteepdeclinesof50%and46%respectivelysince1Q11(Figure4).Inresponsetothisgoodnewsaswellasthegeneralreboundinpropertyvaluesreportedearlieritshouldntbeasurprisetoseethean88%spikeinalllistings(notjustdistressedproperties)sincethebeginningof2012reportedinFigure5.

Hereswherethebadnewsstartstocreepinthough.Figure5alsoshowsthatsincethebeginningof2Q12,listings

haveatbeststayedlevel,indicatingthepossibilityofsaturation.Possibilityturnstoreality(certainlyforthedistressedproperties)whenyoulookatFigure6andseethesteadyincreaseinMonthsSupplyofREOListingssincethemiddleof2011.

Its not quite a buyers market, but the signicant increase in supply in Phoenix certainly goes a long way to explain theslowing in property valuation Momentum being reported or several segments reported in section 2 above.

Afterestablishingthebaselineofsupply-sideissuesinamarket,thenaturalnextstepistolookathowdemand-sidevariables are being impacted by supply and how they, too, are driving property values and general market trends.

Figure 4

New Foreclosures and REO Inventory in Maricopa County

Jun06

Jun11

Jun12

Jun07

Jun08

Jun09

Jun10

5,000

0

10,000

20,000

30,000

25,000

15,000

New Foreclosures

REO Inventory

Source: DataQuick RiskFinder Distress


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Figure 6

Months Supply of REO Inventory, Maricopa County, AZ

Jun06

Jun11

Jun12

Jun07

Jun08

Jun09

Jun10

5

0

10

20

25

15

Source: DataQuick RiskFinder Distress

Source: DataQuick National Property Database

Figure 5

Number of Listings in Maricopa County

Jul11

Jul12

Sep12

Sep11

Oct11

Dec11

Jan12

Mar12

May12

Jun12

Aug12

Aug11

Nov11

Feb12

Apr12

1,000

0

2,000

4,000

6,000

7,000

5,000

3,000

Condominium

Single Family Residence


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Phoenix buyers had more choices over the last 12 months as supply surged. When you combine increased supply

witha41%dropindistresseddiscountpropertyrates(Figure7)andathedropinREOinventorydocumentedearlier(Figure4),thesignicantchangeinthemake-upofpropertysalesintheCountyillustratedinFigure8isntsurprising.Specically,non-distressedsales,whichaccountedfor39%ofallsalesinSeptember2011,jumpedto62%inSeptemeber2012.Buyers,whengiventhechoiceofadistressedornon-distressedproperty,aremuchmorelikelytooptforthenon-distressedpropertyespeciallyiftheydontfeelthereareasmanybargainstohaveinthedistressedmarket.

isanalysiszeroedinonREOInventoryandListingskeyindicatorsofmarkethealth.Othermetricsthatcouldhave been actored into the analysis include local market statistics on oreclosure lings, negative equity, and shadowinventory.

Figure 8

Distressed vs. Non-Distressed Sales in Maricopa County

September 2011

September 2012

Non-Distress REO Short Sale Auction

40%

50%

60%

70%

62%

39%

33%

12%13%

15%

12%13%

30%

20%

10%

0%

Source: DataQuick National Property Database

Figure 7

REO Discount, Maricopa County, AZ

Jun06

Jun11

Jun12

Jun07

Jun08

Jun09

Jun10

5%

0

10%

20%

25%

30%

15%

Source: DataQuick CMV-Distress


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isquestionisntdeceptivelysimple.Itsjustplaincomplicated.Tere are many important variables that need to be considered when evaluating the viability o a local rental marketincluding:

Rentalratesandrentappreciation Expectedpropertyappreciation

Propertyoperationalcosts/operatingmargin Holdingperiod

OverallreturnUtilizing property intelligence rom the DataQuick National Property Database, public domain rental data, andseveralmarket-drivenassumptions,Table2presentsrealexamplesillustratingtheoverallreturnaninvestorwouldrealize rom investing in rental properties in the diferent parts o the country.

Te key assumptions used in this analysis: Holdingperiodforthepropertyis3years

Rentaloperatingreturn(rentalincomeafteroperatingexpenses)is20% Annualrentalappreciationrateis4%

wo key insights ow rom this analysis. erst,andmostobvious,isthatMiami-Dade,FLandMaricopa,AZCountiesprovidebyfarthemost

attractivereturnsofthe6localmarketsevaluated.Whenyouconsiderpropertyappreciationandrentalreturn

(net o operating expenses) these two counties deliver nearly a 2x return in comparison to the other counties. Perhapsjustasimportantthoughiswhatdrivesthelargestreturns.Specically(andnotsurprisingly),high

overallreturnsaredrivenmuchmorebypropertyappreciationthanrentalreturn.Using,Miami-Dadeasanexample,Table2showsthat77%oftheoverallreturnontheinvestmentistheresultofpropertyappreciationduringtheholdingperiodasopposedtojust23%fortherentalreturn.emoralofthisstorywhichbecomesincreasingly more impactul as we move back to market conditions where steady property appreciation becomesthenormacrossmostlocalmarketsisthatinvestorsneedtorealizethatwhilerentalincomecanprovideaboost to their expected gains, the lions share o the return will come rom property appreciation. In todays andtomorrows market, its the rst and most important actor to consider in making the investment.

Is this a strong rental market?

Average Single Family Residence (SFR) Value, 12/20091 $262,467 $241,258 $269,894 $309,267 $274,605 $514,853

Average SFR Value, 12/20121 $308,029 $281,057 $285,935 $342,382 $277,861 $526,713

Average Monthly Rent 4 BR SFR, 20092 $1,803 $1,567 $1,818 $2,385 $1,818 $2,326

Gross Rental Income (2009-2012) $67,539 $58,699 $68,101 $89,340 $68,101 $87,130

Net Rental Income (assumes 20% operating margin) $13,508 $11,740 $13,620 $17,868 $13,620 $17,426

Net Revenue from Property Sales w/o Rental Income $45,562 $39,799 $16,041 $33,115 $3,256 $11,860

Net Revenue from Property Sale w/Rental Income $59,070 $51,539 $29,661 $50,983 $16,876 $29,286

Overall Return w/o Rental Income 17% 16% 6% 11% 1% 2%

Overall Return w/Rental Income 23% 21% 11% 16% 6% 6%

Percent Return from Property Appreciation 77% 77% 54% 65% 19% 40%

Percent Return from Rental Income 23% 23% 46% 35% 81% 60%

1 Source: DataQuick Automated Valuation Model

2 U.S. Department of Housing and Urban Development

Miami-Dade, FL Maricopa, AZ Riverside, CA Broward, FL San Bernardino, CA San Diego, CA

Table 2

Tracking Investment and Rental Returns


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Distressed properties will likely always be available at a discount, but the pressing question or investors and savvyhome buyers is where do those discounts remain high? Given market dynamics already discussed as well as the sheerincrease in demand or distressed properties, its become apparent that some markets are no longer as attractive as theyusedtobe.Likealloftheotherquestionsraisedinthisguide,therearecleardistinctionsinmarketbehaviorandtrends

in diferent geographies that can help guide you to the areas ofering the best opportunity.

Table3illustrateshowlocalmarketsarebehavingdierentlyinthisarea.

InMaricopaCounty,AZ,thedynamicsoutlinedearlierareclearlyinplay.Discountrateshavefallendramaticallyoverthepastyear(41%)indicatingfarfewerbargainsthanwhatsbeenavailableinthepast.estoryisverysimilar in San Bernardino County, CA

BrowardCounty,FLhasalowerdiscountratethanitsneighborMiami-Dade,butrateshaveactuallyrisenby5%over the past 12 months. Tis would appear to be a market with a recovery thats been placed on hold and onewhereopportunitystillexists.AndeventhoughMiami-Dadehasseena10%YOYdeclineinthediscountrates,

the rates themselves are still at very high levels comparatively. South Florida in general appears to ofer a greaterchance or higher returns or distressed property investors.

Does the market still offer attractive distressed property

investments?

November 2011 Distressed Discount Rate 27% 27% 25% 38%

November 2012 Distressed Discount Rate 16% 21% 27% 34%

YOY Change -41% -20% 5% -10%

Maricopa, AZ San Bernardino, CA Broward, FL Miami-Dade, FL

Table 3

Discount Rates in Select Counties

Source: DataQuick CMV-Distress


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DataQuick has developed a number o advanced data and analytic components to drive more efective local marketanalysis. Many were utilized in the examples in this best practices guide. More importantly, these components can bedeployed as either standalone solutions or integrated solutions to meet your specic needs.

National Property DatabaseAccessto125millionparcelsand250milliontransactionhistoryrecordscoveringthelargemajorityofsalesandloanactivity in the United States.

Neighborhood Level HPIDataQuick improves on traditional Home Price Indexes by tracking trends at the neighborhood level, deliveringmonthly updates, and tracking single amily residences and condominiums separately.

RiskFinder DistressAnexhaustivedatabaseof20distressedpropertytrendmetrics.Monthlyupdatesalongwith10yearsofhistory.

Collateral Validation (CV)Reduces collateral risk by determining i a property value alls within an acceptable accuracy range.

CMVComprehensive, multivariate automated valuation model (AVM).

CMV-DistressAn AVM designed exclusively or distressed properties. Estimates discount expected or a Short Sale, Auction Sale, orREOLiquidation.

CMV PortfolioAnAVMdesignedspecicallyforportfolioriskmanagement.Delivershigherqualitybyleveragingfoursub-modelsinthe calculation o a property value as well as a condence score and orecast standard deviation.

Market Intelligence (MI)A competitive intelligence and customer acquisition tool, MI reports real estate volume/activity and lender share basedoncustomer-specicinputcriteria(geographicfocus,loanproducts,competitors)

RiskFinder RMBSImprovesaccuracyofRMBSportfoliovaluationsbyincorporatingpost-originationintelligence(updatedCLTV,occupancy changes, ownership changes) into deault and cost models.

Loan Position ModelingSophisticated lien positioning modeling

PropertyFinderAweb-basedsearchtooltoaccesspropertylevelintelligenceincludingpropertycharacteristics,transactionhistory,sales comps, valuation estimates, and neighborhood demographics.

DataQuick Delivers the Fuel to Drive Local Market Analysis

Conclusion

eneedforacomprehensiveviewoflocalmarketshasneverbeengreater,butsoarethechallenges.Lenders,Servicers, and Investors must determine the right sources or the required intelligence, how to analyze the intelligenceonce its acquired, and nally, how to integrate it into existing work ows to ensure every decision about a property canbe made with the condence that the unique dynamics o the local market have been accurately considered.


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DataQuick's Guide to Best Practices in Analyzing Local Real Estate Markets