The real estate sector is highly complex and it has been raising more and more interest from the specialized economists, especially in the aftermath of the 2007 bubble burst. In order to better understand the field, the crisis and lessons to avoiding future problems, it is useful to research some of its notable dimensions, such as those listed below:
The real estate appraisal profession
The real estate appraisal processes
A real estate approach comparison
A study of the influences on market value
Trends in the real estate appraisal industry
The reasons of the real estate market collapse.
The real estate appraisal profession
The real estate appraisal profession revolves around the conduction of analyses with the scope of assessing the value of real estate properties, such as lands or buildings. The real estate evaluators have to be objective and they have to centralize vast information to form a solid opinion.
"The role of the appraiser is to provide objective, impartial, and unbiased opinions about the value of real property -- providing assistance to those who own, manage, sell, invest in, and/or lend money on the security of real estate. Appraisers assemble a series of facts, statistics, and other information regarding specific properties, analyze this data, and develop opinions of value" (Appraisal Institute, 2012)
The real estate appraisers use comparative properties in order to create value estimates for a given real estate property and their services are often required when a real estate property is about to be sold, purchased, subjected to taxation, mortgaged or developed (The United States Department of Labor, 2012).
In order to exercise their responsibilities, the appraisers must possess vast knowledge in the field, as well as the ability to transfer the theoretical knowledge into practical situations to deliver sound estimates. The Appraisal Institute points out to the existence of four specific categories of appraisers in the domain, namely the appraiser trainee, the licensed real property appraiser, the certified residential property appraisal and the certified general real property appraiser.
3. The real estate appraisal processes
As it has been mentioned previously, the real estate process is generically based on comparisons of similar properties as the property assessed, and the final creation of estimates based on the observations. The actual process is nevertheless more complex, including the statistical assessment of data and figures.
The first step of the process is that of the appraiser meeting with the person or group soliciting the appraisal. At this stage, it is important to assess the reasons for the evaluation (e.g. mortgage, sale and so on). The evaluator would then see the real estate property and would develop a list of comparative properties, against which to benchmark the assessed property. The appraisal would engage either or all of the three approaches to value, namely the cost approach, the sales comparison approach and the income capitalization approach (The Shehehon Company for Business and Real Estate Evaluations).
4. A real estate approach comparison
The valuation of the real estate properties can be completed through several approaches, one important such approach being the cost approach. With the aid of the cost approach, the real estate appraisers rely extensively on the value of the land in a numeric manner, through the assessment of the financial value of the property, minus its investment costs and depreciations.
"The cost approach considers the cost of the land plus the replacement cost of improvements minus the physical and functional depreciation" (Reimer, 2006).
Then, the sales comparison approach is characterized by the creation of value estimates for a property based on the stated values of other similar properties. These estimates are based on the data available for other properties, such as properties which a communicated value or properties which have recently been sold at known prices. The sale approach reveals the price at which the assessed property would likely be sold.
Last, the income capitalization approach revolves around the estimations of the income that would be generated by the property if it were to be rented at market rates; this approach deducts costs with renting, such as vacancy periods or difficulties in collecting the rental feeds, and is completed with the aid of capitalization methods and rates (The Shehehon Company for Business and Real Estate Evaluations).
5. A study of the influences on market value
William L. Ventolo and Martha R. Williams argue that there are four specific factors which generate impacts on the market value of the real estate properties. These factors refer to:
Physical and environmental factors, such as climatic and other conditions, e.g. location in a region prone to earthquakes or flooding, which generate crucial impacts on the value of real estate properties.
Economic factors, referring specifically to the state of the economy. The real estate values are directly connected with the state of the economy, in the meaning that a weak economy, with low salaries and decreased consumer power decreases the value of properties, whereas a strong economy increases the market value of real estate.
Governmental and legal factors, referring primarily to the regulations of real estate purchase, which add complexities; for instance, the more taxes one has to pay for a property, the higher would be the cost of the purchase
Last, there are the social factors of influence, revealing specifically increasing market values for the more demanded types of real estate property, such as houses, but, more recently, also condominium apartments (Ventolo and Williams, 2001).
6. Trends in the real estate appraisal industry
The efforts of real estate appraisers throughout the more recent periods are following two important trends. On the one hand, there is the more intense integration of prudence and prudential principles in the generation of estimates, a lesson learnt from the economic crisis and the burst of the real estate bubble in the second half of 2007.
The second trend is represented by the increasing emphasis placed on the environmentally safe trait in the evaluation of the real estate properties. In other words, a new factor of influence is identified in the ability of the property to be created and utilized in a manner in which it generates little negative impact upon the surrounding environment. Additionally, the appraisers themselves are seeking ways to integrate more environmentally safe procedures in their own operations.
"Appraisers are realizing they need to address the value of green for the future of their business. We've reached a tipping point of sellers/investors who have green features in their listings and the need to be able to quantify how to value it has never been higher. Currently one of the biggest topics of discussion in the appraisal community is green and more green educational programs are becoming available to appraisers" (Simcoe, 2011).
7. The reasons of the real estate market collapse
As it has already been mentioned, a primary cause of the recent developments in the real estate sector is represented by the burst of the real estate bubble in the second half of 2007. Since then, the property values have been gradually decreasing, causing a wide array of social and economic problems. Among the more notable causes of this collapse, one could mention the following:
The issuance of sub-prime mortgages to credit solicitants that were unable to repay their debt, coupled with the emergence of interest-only monthly payments, which allowed the debtors to only pay interest, and no principal
The bankruptcy of large size Wall Street players and the loss of billions of dollars (The Financial Crisis Inquiry Commission, 2011)
The creation and swapping of mortgage backed securities, which increased the risks associated with defaults on credits and which subsequently increased the risks and problems associated with collateralized debt obligations (Amadeo).
The real estate crisis that commenced within the second half of 2007 is the result of numerous factors which…