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Analyzing Local Markets
Transforming Information into Intelligence
DataQuick
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Best Practices for Driving Higher Quality
Lending, Portfolio Management, and
Investment Decisions
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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
Best Practice #2 Page 5
Best Practice #3 Page 6
Best Practice #4 Page 9
Best Practice #5 Page 10
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 Home Price Index (HPI) and look at morelocalized price trends in Maricopa County (Figure 2), you can answer the question Yes, but you can also answer No andMaybe. 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
85017
85029
85248
85301
85375
85387
Figure 1
Home 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).Inresponsetothisgoodnewsaswellasthegeneralreboundinpropertyvaluesreportedearlieritshouldntbeasurprisetoseean88%spikeinalllistings(notjustdistressedproperties)sincethebeginningof2012reported(Figure5).
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 (able 1).
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)andthedropinREOinventorydocumentedearlier(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
Overallreturn
Utilizing 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%
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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wo key insights ow rom this analysis.
erst,andmostobvious,isthatMiami-Dade,FLandMaricopa,AZCountiesprovidebyfarthemostattractivereturnsofthe6localmarketsevaluated.Whenyouconsiderpropertyappreciationandrentalreturn(net o operating expenses) these two counties deliver nearly a 2x return in comparison to the other counties.
Perhapsjustasimportantthoughiswhatdrivesthelargestreturns.Specically(andnotsurprisingly),highoverallreturnsaredrivenmuchmorebypropertyappreciationthanrentalreturn.UsingMiami-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?
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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
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