Appraisal Buzz – I vividly recall April 12, 1981, as if it were yesterday. As a junior in college, I found myself huddled around a small TV with friends, eagerly watching Columbia’s inaugural flight of the space shuttle program. It was an awe-inspiring display of forward-thinking technology—a reusable spacecraft, the next generation of space exploration. Initially, NASA had envisioned the space shuttle program to have a 15-year operational lifespan. However, the program’s remarkable longevity, spanning 30 years, far exceeded its original plan. During this extended period, NASA redirected its focus to deep space exploration. The space shuttle program finally came to an end in 2011, primarily due to its outdated design, aging technology, and its inability to meet the evolving goals of the organization.
In 1986, five years after the launch of the first space shuttle, Fannie Mae and Freddie Mac introduced the Uniform Residential Appraisal Report (URAR) form. Residential appraisers still use this form, albeit with some minor modifications, to this day. While we appraisers will continue using this form for the next year or so, like the space shuttle, it is about to be retired. After a 40-year lifespan, the form 1004/70 and its variations will be mothballed. The primary reasons for this decision are its outdated design, aging technology, and inability to meet the evolving goals of the organization. Sound familiar?
I’ve written numerous articles about this transition, but today I want to highlight a significant difference between the past and the future reports. Notably, the neighborhood section has vanished, replaced by a section titled “Market.” The new market section in the report demands specific data points, charts, and minimal commentary. I believe this change is the right direction. These alterations align more closely with appraisal methodology. Let me explain.
Let’s begin by defining the terms themselves. In a recent selling guide announcement by Fannie Mae (November 6, 2024), it was mentioned that they had collaborated with Freddie Mac to update the standardized definitions for “neighborhood” and “market area.” The updated definitions are provided below, along with their corresponding definitions from the Appraisal Institute.
| Fannie Mae/Freddie Mac | Appraisal Institute | |
| Neighborhood | A congruous group of complementary land uses. | A group of complementary land uses. |
| Market area | The geographic region, for a subject property, from which most demand comes and in which most of the competition is located. | The area within which a subject, property competes for the attentions of buyers and sellers. |
These definitions are quite similar, and the revised ones offered by the GSEs closely resemble those of the Appraisal Institute. However, the reason behind these updates lies in preparing for future changes and the removal of the “Neighborhood” section to introduce the new “Market Area” section. This shift in focus from “neighborhood” to “market area” is a positive step taken by Fannie Mae and Freddie Mac. As appraisers, it’s crucial to analyze markets rather than neighborhoods.
The 15th edition of The Appraisal of Real Estate states the following:
“The term market area may be more relevant to the valuation process than either neighborhood or district for several reasons:
- Using the umbrella term, market area, avoids the confusing, and possibly negative implication of the other terms.
- A market area can include neighborhoods, districts, and combinations of both.
- Appraisers focus on market area when analyzing value influences. A market area is defined in terms of the market for a specific category of real estate, and thus is the area in which alternative, similar properties, effectively compete with the subject property in the minds of probable, potential purchasers, and users.”
A market area in residential real estate could include numerous neighborhoods that compete for the same potential purchasers. While some neighborhoods exhibit uniformity, others feature diverse architectural styles, sizes, and property types. Within a single neighborhood, distinct market segments may exist, catering to varying preferences. If we solely focus on the neighborhood, we risk overlooking relevant data that could significantly impact credible assignment results.
The word “credible” is extensively used in the Uniform Standards of Professional Appraisal Practice (USPAP). However, there’s one word that doesn’t make an appearance in USPAP as frequently: “neighborhood.”
The new GSE market section aligns with the language used in USPAP Standards 1 – 4, which govern residential appraisal development, reporting, and review. Notably, these Standards do not contain the word “neighborhood” anywhere, including the preceding sections such as the preamble, scope of work, and so on. However, Standards Rule 1-3 does require appraisers to identify and analyze the impact of market trends on the use and value of properties, but it does not mention the word “neighborhood.”
On a side note, “neighborhood” does appear in Standard 5 that is relevant to Mass Appraisal Development. This Standard has not been updated in sometime and needs to be considered by the Appraisal Standards Board in future editions. Additionally, you will find the word “neighborhood” used in several advisory opinions, but most of these relate to the current forms and/or new opinions regarding appraisal bias. For consistency, this language probably ought to be considered by the Appraisal Standard Board as well.
I think Appraisers will find the new market section of the report much more succinct and faster to complete than the existing neighborhood section in the legacy form. Gone are all the check boxes for neighborhood characteristics, one-unit housing trends, and land use percentages. Let’s be honest, we just guess that the land use percentage and the other checkboxes only lead to additional inquiries from underwriters anyway.
Replacing these checkboxes are numeric values and enumerated fields. The numeric values represent the number of active listings, days on the market, and their price range. They also include the number of pending listings without a price range and a sales survey that provides information about the time-period searched, price ranges, and the source of the price trend. Enumerated fields include demand/supply and overall marketing time. The appraiser will need to specify the market area boundaries, and the search criteria used in the MLS system. If graphs are provided, the appraiser will not need to provide a narration on price trends. This eliminates the need for guesswork and ensures that all data is presented with minimal commentary.
With the new market section, the data at the top of page 2 will be incorporated, and the 1004 MC (still required by some clients, although not by the GSEs) will see its final day. Irrelevant information will be eliminated, and appraisers will tell the story of the market, not the neighborhood. If you would like to see this section in action, follow this link for training by the GSEs. Open the menu and select Module 10.
These changes, effective in the new report, will commence limited production in September 2025. Mandatory implementation will occur on November 2, 2026. Here’s a link to the timeline. The transition will be challenging. All stakeholders, including appraisers, lenders, AMCs, and the GSEs themselves, will utilize the legacy form while introducing the new URAR report on certain assignments. The GSEs will need to completely rewrite and implement a new selling guide. The neighborhood section will be entirely rewritten with new language aligned with the market section. Other stakeholders (appraisers, lenders, AMCs) must comply with the existing selling guide on legacy forms and be aware of the requirements in the new selling guide for the new report. It’s a significant undertaking for everyone involved.
Yes, I remember April 12, 1981, and the advent of the space shuttle. The space shuttle is no longer around, but NASA’s Orion spacecraft is being built to take humans farther than they’ve ever gone before. I look forward to November 2, 2026, when all these changes are behind us. I believe changes in technology and valuation perspectives will keep appraisers relevant in the valuation process and make us better appraisers than we’ve ever been before. Moving from “neighborhood” to “market area” is one of those positive changes.
This article was written by Ernie Durbin and originally appeared in Appraisal Buzz.