What is a bifurcated market?

What is a bifurcated market?

I am sure you have all heard the term bifurcated before; the question is what does it mean?

Basically a bifurcation of the market relates to two different market segments that may have the appearance of being the same, but in essence are not; two different branches as it were. In order to show this in action, I have taken the Ann Arbor Board of Realtors MLS and examined one area that is fairly homogeneous (Lincoln School District) and separated the foreclosed (REO) properties from the arm’s length sales. I have then presented them as graphs, with a little bit of analysis underneath so you can see what appraisers deal with on a daily basis.

This first graph includes the number of sales over time for both foreclosed properties and arm’s length sales. In all instances the data is run on annualized monthly data runs, which include one years’ worth of sales at a time, run by month (eliminates seasonality). Clearly, the number of foreclosed properties has been declining at the same time the number of arm’s length sales has been increasing. What do you expect to see when this happens?

Hint, price increases!

Look at the data above; price increases all around after a period of stability. Price increases are happening in the REO sector at a quicker rate than with the arm’s length segment. The arm’s length segment shows price stability over the past five months whereas the REO market still shows an increase. This is bifurcation.

Observe the difference in median sales price between the arm’s length sales and the REO sales.  Generally, there is a $20,000 gap or more in price between the arm’s length and distress sales. If there were an adequate number of arm’s length sales available, would there be any reason to consider a foreclosed property in comparison to an owner occupied house in good condition? The only time this might come into play is when there is some feature that the appraiser is trying to analyze that requires using distress sales. You will often see that happen when the subject property is larger than everything else is (or smaller) and the appraiser attempts to “bracket” the size.

If you consider all the REO sales over time, the prices have increased in median price 25.48% over this two plus year period. If you analyze arm’s length sales, prices have increased 15.38% for the same period (10.78% of it in the previous year). While prices have obviously improved, the difference is not as great as the news media has indicated lately. By comparing an entire market there is a false sense of greater improvement, simply due to fewer distress sales showing on the market. Which way of looking at the market do you consider to be more realistic?

As always, if you have valuation needs in Washtenaw County, think of Rachel Massey first!

Rachel Massey, SRA, AI-RRS www.annarborappraisal.com