This post first appeared on Minyanville.

It appears even the embattled homebuilding industry is getting rosy-eyed, finding enough “green shoots” of economic recovery to stick their shovels back into the ground.

In May, US builders broke ground on 17.2% more projects than in April, far exceeding analysts’ expectations. Work on new apartment buildings leaped, while single-family starts continued what’s now become a 3-month rally.

Although the aggregate figure is still well off last year’s rate, economists are breathing a sigh of relief that the worst of the housing market swoon could be behind us. Skeptics, however, are quick to point out that any recovery could be muted, as high levels of inventory, a weak labor market, and mortgage rates that just won’t seem to stay down, could forestall any recovery.

As Kenneth Simonson, chief economist for the Associated General Contractors of America, told the New York Times, “There’s a real possibility [housing starts] will just stall at a low level. If the recent jump in interest rates is sustained, that could choke off buyer enthusiasm for new homes.”

For nearly 4 years, the business of building and selling homes has been, in a word, lousy. As home prices tumbled, the likes of KB Home (KBH), Toll Brothers (TOL) and Lennar (LEN) slashed prices, offered generous incentives, and otherwise bent over backwards to unload inventory. Building all but stalled, jacking up unemployment — particularly in exurbs and sprawling communities whose economies were largely based on the construction trade. An industry that grew fat during the boom was forced to slim down, lay off workers, and hibernate, while the market’s violent correction ran its course.

And although a host of small builders have closed up shop, to date, no major US homebuilder has gone under. Consolidation, too, has been scant. The only merger of note was Pulte Home’s (PHM) purchase of Centex (CTX), a marriage that, once consummated, will create the country’s largest builder.

The outlook for those builders that remain — builders that are bleeding cash while pleading with creditors to extend loan terms and waive busted covenants — is bleak. Last week, the National Association of Homebuilders/Wells Fargo Builder Sentiment Survey ticked down after rising far more than expected the month before. Higher interest rates are mostly to blame, as the specter of bigger monthly payments is quelling optimism that the housing market is on the mend.

The reality — an unfortunate one for builders and their employees — is that for the foreseeable future, their services aren’t needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.

Builders are also fouling up the nascent housing “recovery” by turning recently completed condominium units into rentals. Even as demand wanes thanks to job losses and tighter budgets, rental inventory is rising. Rents, as a result, are falling. This is great news for tenants, eager to jump on affordable apartments, but bad news for landlords and even homeowners.

One of the most popular arguments posited by housing-market-bottom callers is that in some of the hardest hit areas, prices have gotten so low that investors can scoop up cheap homes and rent them for an attractive return. What they neglect to mention, however, is that this sort of market-clearing activity also increases the supply of rental units, further pressuring home prices. Even in the worst, most washed-out areas, a bottom remains elusive.

By RYAN TAYLOR

What exactly does an appraisal mean?

Perception doesn’t always equal reality. The perception is that an appraisal represents the most accurate value of a property. The reality is that it’s a value provided by a licensed professional, given the purpose and functional use of a property on a given day. The key in that statement is “on a given day.”

While appraisals are indeed very thorough evaluations of a property, they’re not always the most accurate valuation, since they often don’t take into account all the inputs required to derive the current and future value of a home.

An appraiser uses three separate approaches to derive a property’s value:

(1) Sales Approach
(2) Cost Approach
(3) Income Approach

The Sales Approach is similar to comparative market analysis, or CMA, performed by a real estate broker. The appraiser examines comparable (ie, similar) sales and listings from the last 6 months in order to come to a value conclusion. Typically, sales are weighted more than listings, since sales are actual transactions and represent a home’s true resale price, while a listing is simply what a seller hopes to get.

Comparables must conform not only with respect to the subject property itself, but also in neighborhood characteristics. 3 bedroom, 2 bath, 2500 square foot homes on opposite sides of town often sell for very different amounts. Comparables should be within 1-mile of the subject property, but this rule is far from set in stone, as certain neighborhoods dictate a narrower — or wider — radius of comparison.

In the Cost Approach, the appraiser examines the dimensions of the property and structure to determine how much it would cost to duplicate the same home on an identical lot. This is often referred to as “replacement cost.” While this is a useful method for certain types of properties, it’s rarely the most accurate for residential real estate — especially in a volatile market such as we’re currently experiencing.

In the Income Approach, the appraiser determines how much income can be generated from the property and a value is derived from this number. The appraiser usually projects into the future and assumes some ongoing stream of income, discounting the value of that cash flow for the time value of money.

The concept of the time value of money assumes (basically), that most investors would rather receive a lump sum payment now than many smaller payments over time, since inflation causes money to be worth less in the future. Of course, all bets are off during deflation, but that’s another topic for another day.

More often than not, the value of a single family residence is reached through the use of the sales comparison approach.

In reality, the sales comparison approach is effective in providing a well researched value, but it fails to utilize all necessary inputs. While comparable sales are very important to the value of a home, the comparable listings can be — and sometimes are — more important.

We like to view comparable listings as an upper bound for a property’s value, especially in a declining market. For example, if all comparable sales sold 3 months ago for $500,000 and there is a comparable listing is now on the market for $450,000, the listing is far more important than the sales. To ignore the listing and rely on the sales would be inaccurate.

Equally important is the concept of affordability, which is rarely used by appraisers. If there have been very few comparable sales in the past three months, affordability will be increasingly important when trying to understand how much buyers can afford. Weak demand indicates few willing and able buyers in the market, so evaluating prevailing income levels in a particular area help determine whether values are set for small declines, steep declines, or may be approaching stabilization.

Finally, mortgage and credit market conditions — especially now — are very important to the value of a home. In today’s lending world, you need a down payment, good credit and a strong employment history to get a loan. There are plenty of areas where the qualified buyer pool is very shallow. Appraisers don’t put a lot of weight into this fact. 3 sales in the last 6 months means a very different thing if last year there were 30 during the same time period, or just a handful.

While the sales approach does have value, it could be more comprehensive.

A crucial point to understanding appraisals is that the value is today’s value, saying nothing for tomorrow. The reality is that this is an appraisers job; they are not forecasters.

In the current market place, the appraisal can, and some would argue should, be considered irrelevant 30 days after the completion date. When markets can drop upwards of 5-10% in a single month, an appraisal that’s a month old isn’t worth the paper it’s printed on.

However, since the appraisal is still considered by the housing industry to be the most accurate representation of a home’s value, always look at the completion date to determine what lenders and investors believe a home to be worth on a given day. Whether you like it or not, this is the value on that day.

Is the process of reaching an appraised value the most defined valuation process in today’s marketplace?
Definitely.

Is an appraisal the most accurate process to determine the true value of a single family residence? Maybe.

Is an appraisal a projection of what the value of the property will be in the future? Absolutely not.