Assessing Real Estate Markets
December 2007
Real estate markets are cyclical, having phases of highs and lows. Each property type located within the townships and cities of Minnesota have their own cycle even though some districts may have comparatively similar markets. These cycles are generally unique in regards to their degree of change and time-span. They are influenced by international, national, and regional trends but also vary from these tendencies according to local factors of influence.
What creates change in the marketplace for properties?
Change is simply a part of the normal real estate market cycle. All markets for agricultural, apartment, commercial, industrial, residential, and seasonal properties move independently at different growth rates and sometimes divergent directions. The movement in these market segments is caused by changes in supply and demand that are closely linked to the area’s population growth, employment conditions, business activity, government policies, financing, and market perceptions. It is through this transformation that real estate markets pass in and out of phases of steadiness and instability, resulting in a dynamic and ever-changing marketplace.
What are the identifiable points associated with a real estate market cycle?
Variations in supply and demand determine the real estate market cycle for every property type. Each market is comprised of four distinct intervals. The acquisition or recovery phase is a time when the market is at the bottom of the cycle. There is an oversupply of new construction caused by a lack of demand or excessive building. This slowdown lingers until the glut of properties are reduced through various measures. Once demand grows and prices, rents, and occupancy levels improve, the market moves into the next phase called expansion and development. This period is characterized by strong user demand that creates a need for additional space and buildings. Prices, rents, and occupancy levels usually increase at this time causing land prices to inflate and new construction to commence. After this phase runs its course, the market enters into a stage of overbuilding or oversupply. This cycle is set apart from others because supply growth is greater than demand growth. The supply levels continue to increase as building proceeds, the absorption for properties begins to slow, and prices, rents, and occupancy levels begin to weaken. When the severity of overbuilding is recognized by real estate professionals, various strategies are deployed to reduce inventories and maintain price, rent, and occupancy levels. This last point in the real estate cycle is known as the recession or adjustment phase. It reaches the bottom as soon as building either slows or stops and demand surpasses the supply being added to the market.
How long does a particular phase of the real estate cycle last? What degree of change can be anticipated?
The length of time and the amount of change connected to a specific phase of the market will vary according to location, the local economy, and the property type. Some intervals may last one to three years while other stages of the cycle may persist up to ten years. The existing market conditions and the strategies used by real estate professionals to address certain situations will usually dictate the time period and the increases/decreases in prices and rents commanded.
Does the activity associated with a specific market segment affect other markets?
The market for all properties is affected by human psychology that is stimulated via observations, opinions, studies, news reports, and actions. Sometimes an attitude or viewpoint about the marketplace may either be directly or indirectly swayed because different market segments are closely correlated or share the same geographic location. However, the controlling factor that clearly influences each real estate market is the volatility associated with the supply and demand for that specific property type.
What information does an assessor use to form opinions about the marketplace?
An assessor collects and processes general data related to political, economic, social, and physical forces as well as specific data relating to the property type. Comparative cost, sales, and income data are also collected, verified, and analyzed to answer both equalization and appraisal questions. Property record cards, deeds, certificates of real estate value, sales ratio studies, aerial photographs, zoning maps, traffic counts, sworn construction statements, building permits, cost indices produced by research groups, market studies compiled by real estate companies, rental/occupancy surveys, and income/expense statements are examples of information utilized by the assessor to form opinions about the marketplace and to update property assessments. Trade journals, real estate publications, and various industry-related web sites also provide useful data that profile national, regional, state, and local trends.
How does the assessor react to changes in the real estate market cycle?
The assessor annually monitors changes in the local real estate market for all properties by carefully reviewing patterns of over-assessment or under-assessment for each taxing jurisdiction and its neighborhoods. The chief tool used to evaluate the assessment of properties is the sales ratio study. This statistical analysis compares the assessor’s estimated market value with the actual purchase prices of arms-length sales for a one year period. The purpose of this study is to help the assessor determine the level and quality of property assessments and if there is a need for reappraisal or trending and how soon it should be done.
Why does the assessor’s reaction to changes in the marketplace always lag behind current market conditions that are being reported?
By law, the valuations of all properties are updated every year by the assessor on the assessment date, January 2nd. These valuations are based upon sales that occurred within a twelve-month study period covering the months from October 1st of a given year through September 30th of the following year, ending three months before the assessment date. The valuations produced represent a snapshot in time that limits their usefulness for comparative purposes when the marketplace is undergoing changes. For example, when a property owner receives a 2008 payable tax bill in March 2008, the estimated market value reported on this statement was the valuation established on January 2, 2007 based on comparable sales that were identified in the sales ratio study covering the months from October 1, 2005 through September 30, 2006. Furthermore, when a property owner obtains the 2008 notice of valuation and classification in April or May 2008, the estimated market value provided in this notification is set as of January 2, 2008 according to similar sales that are part of the sales ratio study encompassing the months from October 1, 2006 through September 30, 2007.
What is the legal assessment level in Minnesota?
Minnesota’s property tax laws require the assessor to value all property at market value. The legal assessment level is considered to be 100% of market value, but the acceptable level established by the Department of Revenue is when the overall sales ratio falls between 90% and 105% of market value.