"appraise this"

There is a lot of buzz in the undustry today about "low appraisals" inspired by Frank Garay and Brian Stevens on the TBWS Daily Show regarding the Appraisal Complaint Hotline and an article published yesterday in Appraisal Buzz by Mr. Thomas Inserra. 

If you are not familiar with the TBWS Daily Show I suggest that you check it out.  It is a daily video by two mortgage brokers covering a wide variety of industry topics and is both entertaining and informative.  www.TBWSDailyShow.com

There is no doubt that the appraisal industry has been dumbed down by government regulations starting with appraisal licensing and more recently with HVCC.  Briefly, the federal licensing threshold for appraisers was far below that of the private standards that were currently in place.  And, HVCC provided a vehicle for the quick rise of Appraisal Management Companies and their track record of hiring the least expensive appraiser with quickest turn-around time.  Poor criteria for the selection of any professional. 

On the other hand, over aggressive valuations helped to fuel the real estate bubble that finally burst.  One of the posts on the TBWS Daily Show web site was presumably from a mortgage broker who longed for the days when she could use "my appraiser".  There is something wrong about his scenario as well.  This is what HVCC was trying to correct. 

Below is the article from Mr. Inserra.  I think you will find it to be a good read.

Realtors vs. Appraisers

· Buzz Newsletter

Monday, January 23, 2012

By: Thomas Inserra

Dear NAR:

I have been a NAR member since 1984. Having completed hundreds of NAR, Realtor and Real Estate classes since then – ALL with a very positive feedback, I am writing to express my serious concerns about the recent NAR seminar “Productive Engagement with Appraisers” which fell very far short of NAR educational quality standards.

This seminar contained grossly biased, incorrect and misleading information and if seminar participants were to follow the advice rendered, they would be violating very serious federal and state laws and regulations designed to prohibit compromise of appraiser independence. Let me be more specific in articulating my concerns.

Those who presented the seminar were attempting to address the recent rise in instances when the independent value conclusions of appraisers varied with agent value estimates or prices negotiated by buyers and sellers. The two (incorrect) presumptions made by the presenters is that this is a “problem” rather than a reflection of market conditions and it also presumes that the appraiser’s independent and objective conclusions are “wrong”. The seminar also gives the false impression that agents can and should negotiate values with appraisers by outlining how to do that by supplying comps designed to arrive at a higher value and also gives the false impression that agents can affect a lender’s selection of appraisers in loan transactions.

In my market area, over the past year as an appraiser our appraisal business has appraised approximately 35% of all sale transactions below the agent estimate or pending sales price. As a result, I can confirm that this does constitute a noticeable increase over prior years.

In each of approximately 80 transactions appraised below the pending sales price, agents were notified in advance prior to completion of the appraisal and afforded an opportunity to submit Comparable sales in an attempt to support the sales price. In each transaction - agents submitted between 2 and 20 sales for consideration with an average of 6 sales submitted for each property. Without exception, 100% of the sales submitted (about 500 sales provided by agents) actually supported the lower appraised value and not a single sale supported the higher proposed price. Even more disturbing, upon interview of participants in the transaction, the appraiser observed a very high increase in the number of transactions where parties to the transaction were related to or had some connection to the agents involved.

“Price” is much more likely to equal value when transactions are truly arms-length transactions, but the large increase in transactions to related parties has likely had an effect, which naturally will increase the rate of disparity between price and value. Given the large decline in price levels, we are finding many sellers/owners are in denial about price levels. In one example, our appraisal contained a list of 50 sales and listings located within one mile of the subject property with all 50 having prices lower than the pending sale transaction without a single sale or listing priced at or above the pending sale. These market facts clearly demonstrated and confirmed the pending sales prices simply was not supported with factual market data.

In my view, in nearly 100% of the cases where agents submitted Comps which they thought or had hoped demonstrated a higher value, that those sales actually demonstrated and supported a lower value indicates that the true disparity between agents and appraisers is driven by two key factors. This suggests there is a difference in how agents price properties and how appraisers estimate “Market Value” and indicates there are two primary drivers for the difference between agents and appraisers:

1. The difference between advocacy and objectivity/independence; and
2. Differences between how agents are taught to value property and appraisers are taught to value property.

I was very disappointed that this seminar failed to address either of these 2 items for if the true reason is to help agents understand and cope with value disparity, the seminar clearly fell way short and by failing to address the true drivers was therefore inadequate and misleading.

With regard to item #1: I am disappointed the seminar failed to discuss the difference and conflicting objectives and legal requirements of agents versus appraisers and how that goes a long way to explain differences in opinion. For example, the foundational principle of being an agent is the legally binding fiduciary requirements of an agent to be an advocate to one or more party of the transaction. If for example, the agent represents the interests of the seller, they would be required to be an advocate for the sellers desired interest of selling the property for the highest amount possible. Conversely, a buyer agent would be required to be an advocate for the buyer’s interest to help buy the property at the lowest possible price. Another inherent conflict between the role of agents versus appraisers is that agents being compensated on commission only get paid if the transaction closes, so there is a natural bias and advocacy need to take action aimed at getting deals closed, even if that means the price is not truly reflective of market conditions.

Appraisers on the other hand have the exact opposite legal requirement. Appraisers are legally and ethically required NOT to be an advocate for their party. Appraisers are not permitted to be purposely high or purposely low when rendering market value estimates and must be objective, non-biased and free of advocacy. Appraisers are precluded from taking action simply to help a deal close and rather must stand firm when factual market data indicates a pending price is not supported by factual market data. Another major distinction is that while appraisers are legally required to estimate “Market Value”, while agents typically render BPOs price estimates. Price estimates and Market Value estimates are not the same nor is the methodology for arriving at each the same.

I’ve attached three articles describing how the legal obligations of agents when rendering price estimates is notably different than the legal requirements of an appraiser and how to resolve the conflict between “Advocacy” required of agents versus the “Independence and Non-Advocacy” required of appraisers. Frankly, NAR needs to do a better job of educating agents and the public about the two types of value estimates in the USA: Advocated value estimates and non-advocated value estimates and how they differ. There is no true “battle” between agents and appraisers because they each are fulfilling different yet important roles in the real estate transaction and increased knowledge and understanding of the difference between the two roles is necessary and thus needs to be addressed in the seminar. Agents render Price estimates as an advocate to one or more party in the transaction while Appraisers render independent, objective and non-advocated Market Value estimates. The seminar needs to address the conflicting duties of each to improve understanding.

With regard to item #2: I am disappointed the seminar failed to address a notable flaw in how agents are (incorrectly) taught to value properties. Because the role of agents is to be an advocate for the transaction, rather than taking the objective approach of looking at market data both higher and lower than their proposed transaction, 100% of the Comps supplied by agents were selected solely because they appeared to support a higher price. The most common technique employed by agents, was simply to find the highest priced sales and listings and to send those to the appraiser, with inadequate attention to how similar that property actually was to the home being valued. Another common technique employed by agents was to simply select those comps with the highest price/SF which invariably means smaller sized homes were selected. There is a proven economic principle known as “diminishing marginal utility” which agents seem to be unaware. Most agents I know when valuing a home simply take the size and multiply it by a price/Sf and that is a very flawed approach because it fails to account for diminishing marginal utility and fails to account for other differences which might exist among the properties. Another economic concept that appears to be a mystery to agents is the concept of “contributory value”. When making adjustments for differences between properties, agents tend to apply cost while appraisers are required to utilize market based contributory values. For example, when valuing a brand new home a builder might want to include the full cost of a $28,000 swimming pool, while in our Arizona market the contributory value of a pool may only be a $12,000 impact on “Market Value”. Thus, to improve the understanding of the difference between agent advocated prices and independent/objective appraised values, the seminar must address the flawed methodology employed by agents to improve the accuracy in their market based rather than advocated price estimates.

Finally, I’d like to express my serious concern about 2 inadvertent takeaways from the seminar which give the false and very dangerous impression that:

1. Appraised values are negotiable when agents believe appraisers are low;
2. That agents can impact or change the selection of appraisers or have the right to evaluate the appraiser’s credentials

Most appraisals are ordered by lenders in connection with a loan transaction. Federal regulations specifically prohibit negotiation of appraised values or any contact by agents aimed at obtaining a higher value estimate. In fact, in our state, such action under ARS 32-3633 would be classified as a Class 6 Felony. With regard to selection of the appraiser, federal banking regulations PROHIBIT the selection of appraisers on the basis of complaints or requests of agents or parties to the transaction and specifically require the lender to make the sole selection in their best judgment. Thus, the seminars suggestion that agents should be evaluating the credentials of appraisers and taking agent designed to affect the selection of the appraiser would also constitute illegal activity. If the agent is successful at impacting the selection of the appraiser and the loan on that property ultimately goes bad, the agent would potentially face very serious civil and criminal charges for interfering with the independence of the appraisal process.

Appraisers can NOT be independent if agents are permitted to have an impact on appraiser selection, nor can appraisers be independent if agents view their role as negotiating values with appraisers when appraised values differ with those of agents. Thus, while it may not have been an intended seminar objective, perhaps an unintended consequence of the seminar is that it incorrectly attempts to corrupt the independent role of appraisers and frankly, that is not only unethical, it is illegal.

What is necessary to successfully address the variance between independent and objective appraised values is improved understanding of the important objective and non-advocate roles of appraisers and for agents to respect that role by NOT negotiating values and NOT trying to affect appraiser selection.

Finally, I would like to address a recent flawed study performed by NAR that appeared to be biased purposely to blame appraisers for declining price levels and to help mislead the public about the role appraisers play.

As a NAR member, I took the survey in my capacity as an agent. I was very surprised and alarmed that among all the possible answers to the survey - they all blamed appraisers rather than market conditions. Having a choice to indicate that this was simply a function of market forces wasn’t even an option, which means the only possible outcome of the survey was to blame appraisers since no other choices were available in the survey question. Shame on you.

It is important to note that in our market, even disregarding distressed sale transactions, that Phoenix was #2 in the nation in the rate of value and price declines. It is also important to note that the rate of homeownership both nationally and locally has been declining rapidly demonstrating lower levels of demand for housing than in years past. Those decreased levels of demand along with unemployment are in fact driving price reductions. It is also very important to note that about 40% of the homes and transactions in the Phoenix area are mortgage free and thus their final negotiated prices are unaffected by appraisals. Thus, it is grossly misleading to the public to suggest that appraisers are to blame for declining price levels when in fact these declining price levels are the result of market dynamics and are NOT being caused by appraisers. Appraisers are merely reporting the facts about what is happening in the market. Shame on NAR for giving the public the false perception that declining prices and lost deals are the fault of appraisers. A more balanced and fact based approach is necessary along with one that recognizes the important role that a non-advocated party plays in confirming that negotiated prices are arms-length and truly reflective of market conditions.

NAR realized after the Great Depression that having only “advocated” values led to a dangerous and unsustainable price bubble that was found to be a major contributing factor to the Great Depression. To help correct the abuses of advocacy and to establish “balance” and sustainability, NAR invented the appraisal profession and from 1929 to 1994 declared that it is a conflict of interest for agents to render valuations for lenders. NAR needs to re-establish its credibility by reaffirming the need for total independence and objectivity by again stating that it is inappropriate for agent advocates to render values for loan transactions because of an inherent conflict of interest. NAR needs to again recognize the important need for a non-advocated appraiser to ensure transactions are market supported, arms-length and sustainable because that is the only way to prevent dangerous price bubbles which lead to huge financial crisis.

As CEO of We Value America, LLC, I provide a considerable amount of expert witness testimony to evaluate the Standards of Care and conduct of agents, lenders and appraisers. In my view, this NAR seminar inadvertently encourages unethical and illegal conduct and thus should be significantly revised, updated and corrected to meet NAR’s educational quality standards.

Thank you for the opportunity to provide feedback on NAR’s recent appraisal seminar.

Links:
• “Advocacy vs Independence” http://www.appraisalbuzz.com/advocacy-vs-independence
• “Appraiser Neutrality and Public Policy” http://www.appraisalbuzz.com/appraiser-neutrality
• “Anatomy of a Real Estate Bubble” http://www.appraisalbuzz.com/Anatomy-of-Real-Estate-Bubble
• “Anatomy of an Appraisal Fee” http://www.appraisalbuzz.com/anatomy-of-appraisal-fee

About the Author:
Thomas Inserra has 26 years’ experience as the highest ranking collateral risk expert, as CEO or other executive roles at: 2 international banks, 2 global insurers, 2 federal agencies, and 2 international consulting firms. He has served as a Credit Committee member of 13 financial institutions with assets of $21 billion and has reviewed tens of thousands of loan files in connection with his work during 3 major banking crisis – including 2 crisis in the USA and 1 in Asia helping both government agencies and private sector financial institutions to address losses caused by real estate loan losses. This unique experience has allowed Mr. Inserra to identify lending patterns and common collateral risk characteristics that ultimately led to large loan losses at more than 500 financial institutions with total assets exceeding $500 billion. As the leader of a 700 employee U.S. subsidiary of a global insurer he was accountable for managing and insuring risk exposures of a $1 trillion real estate loan portfolio for 12 of the nation’s largest banks. He also served as CEO of a publicly traded technology company which invented and then successfully received a U.S. patent for innovative collateral risk scoring that applies mathematical risk scores similar to a FICO score to help measure real estate collateral risk exposures.

Mr. Inserra has a BS degree from Purdue University, an MBA degree and both the MAI and SRA appraisal designations. He has participated in more than 100 public speeches, media appearances and news interviews including ABC News, CNN, MoneyTV, BNN, National Mortgage News, Washington Post and many others including of course the highlight of his career – frequent articles published for “The Appraisal Buzz” and “Collateral Risk Network - CRN”. Currently, he serves as CEO of We Value America LLC and Pinnacle Peak Advisors LLC advising financial institutions, government agencies, attorneys, insurers and other clients on a wide range of lending and collateral risk exposures, litigation, Standards of Care issues and expert witness services.

December 2011 Housing Statistics

Buyer activity appears to be gaining metro area wide.  The Heartland MLS statistics for December 2011 show combined home sales of 1,833, which represents a 7 percent increase over December 2010 and an 8 percent increase from the previous month.

Unfortunately, data also indicates that their average sales prices have declined from a year ago.  My personal experiences is that values in many areas have stabilized and some have experienced property appreciation. 

The following is a copy of the complete report:

Kansas City Regional Association of Realtors & Heartland MLS

Inventory: The new home inventory for the region is 19% lower than it was a year ago at this time when there were 1,525 new homes on the market. New home inventory for this month was 1,240, representing a 2% decline from last
month’s new home inventory of 1,264. The existing inventory this month is 16% lower than it was a year ago when the existing inventory was 13,713. Existing home inventory this month of 11,571 shows a 7% decrease compared to
12,505 one month ago. One year ago the inventory for new & existing homes was 15,238, which represents a 16% decrease in total inventory over the past year. The new & existing inventory this month of 12,811, compared to 13,769
last month represents a 7% decrease in inventory in the past month.

Home Sales: New home sales this month of 147 were 17% higher from one year ago when there were 126 new home sales in December. New home sales increased this month by 8% from one month ago when there were 136 new home sales. There were 1,686 existing homes sold in December, representing an increase of 6% from one year ago when there were 1,588 sales. Existing home sales were also up 8% from last month’s sales of 1,566. This month’s combined total sales were 7% higher than one year ago when there were 1,714 sales. Combined home sales of existing and new homes were 1,833 for December, which is also up 8% from the total of 1,702 sales from a month ago.

Kansas City Region Supply of Homes on the Market: The Supply calculation is determined by taking the “Inventory” and dividing it by the “12 month average of the number of Sales.” Generally speaking, a 5-6 month supply of homes on the market equates to a “balanced” market. When the supply exceeds 6 months, the market begins to favor buyers, and when the supply is less than 5 months the market tends to favor sellers. Supply for combined new and existing homes was 6.7 months of supply in December. This is lower than the 8 months of supply in December 2010. The existing home supply was 6.6 months for December which is also lower than the 7.8 months supply of existing homes last year in December. The new homes supply in December 2011 was 8.8 months, which is also lower than one year ago when the new home supply was 9.6 months. Combined and existing home markets are inching closer to a balanced market and new homes still favor buyers.

FHA INSPECTION GUIDELINES

HUD recently modified guidelines for inspections on FHA appraisals.  Given the exponential increase in FHA loans during the past year, many of my lending clients have asked for an overview of current inspection guidelines.  I hope you find this information to be helpful.  Please feel free to contact us if you have any questions.   

SUMMARY - Since its inception The Department of Housing and Urban Development (HUD) has established minimum property standards. While these standards have varied over time the recent changes have been some of the most dramatic in decades. By eliminating many of the "nuisance" repairs and mandatory inspections HUD hopes to make it easier to buy or sell a home with FHA financing.

The most recent changes are highlighted bold on this checklist.

POOR CONDITION -

A lack of maintenance that gives a "run down" look to a property is acceptable. Missing or damaged flooring or carpet, rotted or worn out countertops, poor workmanship, damaged plaster or drywall, bathroom tile, missing or damaged interior doors, debris, trash, or other cosmetic items that do not otherwise jeopardize the safety or structural integrity of the property are acceptable and will not require repair.

CONDOMINIUMS -

Projects must be at least 51% owner occupied and may not have a "right of first refusal" clause in the association documents.

STRUCTURAL DEFECTS -

Large settlement cracks, sagging floors or roofs, and significant deteriorated wood are conditions that require professional repair. Grading must be adequate to drain away from house.

TERMITES -

HUD will no longer automatically require a termite inspection. Minor (non-structural) termite damage will not require repair. Wood/soil contact that is not due to a structural problem will no longer require repair. Visible evidence of active or past infestation, or evidence of dryrot will require termite report with clearance of Section I items.

LEAD PAINT -

For homes built before 1978, any peeling, chipping, or chalking paint on the house, detached garage, shed, fence, or anywhere on the property must be scraped, primed, and painted. Use tarps to collect paint chips to avoid contaminating the soil. If the home is built after 1978 HUD will no longer require painting of defective paint surfaces, in most cases.

HEATING -

The property must have a permanent heat source. The heating and air conditioning system (if present) must be operating properly. Space heating systems are acceptable if installed in accordance with local building codes. Combustible (oil/gas) heat requires exhaust ventilation.

ROOFS -

Leaking and worn out roofs require repair or replacement. While a remaining life of at least two years is no longer specified a roof with a life of less then two years should be considered "worn out". HUD will no longer require automatic inspection of a flat roof system.

WINDOWS/DOORS -

HUD will no longer require broken glass to be repaired. Exterior doors that are in poor condition but are otherwise functional are acceptable. Windows that stick, are loose, or are otherwise in poor but serviceable condition should be acceptable with the following exception: Inadequate access/egress from bedrooms to the exterior of the home is unacceptable. At least one window in each bedroom must open and close freely in order to allow escape in case of fire. Burglar bars on bedroom windows must have a release mechanism (at least one per bedroom).

ELECTRIC/UTILITIES/MECHANICAL SYSTEMS -

Fuses are acceptable. 60amp electric service may be acceptable (a small house with oil or gas for heating, cooking, and hot water). Loose wiring, open splices, and other hazardous conditions will require repair. An exception is low voltage (telephone or cable TV) wiring that would not present a hazard. All utilities should be on in vacant homes in order to avoid re-inspection. All mechanical systems must be operating.

CRAWL SPACE & ATTIC -

Access to both the attic and the crawl space is required. Both must have adequate ventilation. Crawl spaces must have sufficient clearance for inspection and maintenance.

PLUMBING -

Minor plumbing leaks and defects are acceptable. Major plumbing problems will require inspection and repair. Water heaters must have a pressure relief valve.

SAFETY CONCERNS -

Smoke detectors are not required but if they are present they must work properly. HUD no longer requires repair of the safety device that automatically stops an obstructed electric garage door opener. Trip hazards such as uneven walkways or sidewalks will not require repair. Missing handrails on stairways are acceptable.

HUD DOES NOT REQUIRE

HUD does not require the following:

• Appliances
• Screens
• Driveways
• Lawn sprinkler systems
• Pool repairs (unless they present a safety concern)

What we do know is that our current economic situation was predictable.  According to a New York Times article published in 1999, as well as several “senior” appraisers that I have been fortunate enough to be associated with, it was.  Lowered credit thresholds combined with lower thresholds for appraiser training heavily contributed to the Perfect Storm that resulted in the mortgage meltdown of 2008.   

Below is an excerpt from an article written in 1999, a copy of which was obtained from the New York Times web site?  Please visit their site to read it in its entirety.  The foresight reflected in this article is fascinating.

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.  

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

“From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Again, the foresight reflected in the NYT article is fascinating.  Equally as fascinating is that many of my mentors also saw the “writing on the wall” with the “Real Estate Appraisal Reform Act of 1987”. 

Prior to state licensing and certification, appraisers became qualified by meeting the standards of private appraisal organizations that required a significantly greater level of formal education, appraisal education, and appraisal experience.  The process typically took several years to complete.  

The Appraisal Reform Act of 1987 was well intentioned.  However, the threshold for qualifications was so low that it flooded the market with appraisers many of whom were not qualified.  To compound the issue, many unqualified licensed appraisers were now the mentors for appraiser trainees.  And, the ethical oversight lacked “teeth”. 

I began my career in the appraisal industry in1986 and vividly recall many of the appraisers that I was associated with that had achieved a designation from one of the private appraisal organizations accurately predicting a dumbing down of the industry.  Their foresight has come to fruition.  Poorly trained appraisers providing poor valuations can accept a share of the blame for this mortgage debacle.   As can many appraisers who were simply unethical and succumbed to lender pressure for higher valuations.

Where do we go from here?  Fortunately, many positive changes are already in place.  In Kansas, thresholds for education and training, including a formal education component, were increased earlier this year.  Requirements for supervising appraisers were also increased.  Our state appraisal board placed increased emphasis on disciplinary actions for those appraisers who produced poor appraisals due to either a lack of training or ethics.  A Home Valuation Code of Conduct is being considered for implementation next year aimed at improving appraiser independence.  More needs to be done, but these changes are a good start. 

The current economic crisis, resulting in large part from a mortgage meltdown, was predictable and avoidable.  As in any life experience, we as a nation need to learn from our experiences, take the necessary steps to ensure that we do not repeat our mistakes, and move forward. 

Wednesday, July 30, 2008

Real Estate and Stocks Have A Lot In Common

A good friend of mine, following a tip from a buddy of his, has been looking into buying a condominium in warm beach front community with the idea of using it as an investment property until he retires.  Not a bad plan.

What concerned me is that Mike stated that "condo's in this area were selling at 50% of value".  To which I replied, condo's are more likely selling at 100% of market value, it just happens that the current market value is half of what it was previously. 

Real estate, like stocks, are greatly impacted by supply and demand influences.  This is an intangible influence that has nothing to do with the physical aspects of the property.  Based on Mike's statement with regard to the declining values of condo's in the market area that he was researching, it may be that the supply of condominiums dramatically exceeds demand which has a downward pressure on values.  This has been a common occurrence in many markets.

A level of inventory that exceeds a 6 months supply is generally considered to be an over supply, a.k.a. a buyers market.  How can you make this determination?  A simple method is to obtain the number of sales in a defined market area that "sold" (contract date) during period of time, say one year.  In this instance, the number of sales is divided by 12 to determine the average number of sales per month, otherwise referred to as the absorption rate.  Then, the number of active listings in the same market area is divided by the average monthly sales, the conclusion of which is the level of inventory in terms of months.   For example, there have been 120 sales in a neighborhood during the past twelve months, an average of 10 sales per month.  There are currently 75 active listings in the neighborhood.  This calculates to a 7.5 month supply of inventory at this absorption rate, which is an over supply.    

Like buying stocks, the objective with real estate is to buy low and sell high.  With regard to the condominiums by the beach, it just might be a good time to buy, particularly if it is a long term investment and the condo has a great view!