Appraisals blamed for killing home sales
Real-estate agents, homeowners and industry experts blame lowball appraisals for preventing a housing recovery. Efforts to improve appraisals may only have made things worse.
This post comes from Marilyn Lewis of MSN Money.
The value of anything is what the market says it is. That's basic economics. Take a home: Its value is what a willing buyer agrees to pay and a willing seller agrees to sell it for.
That's the theory. But in this crazy housing market, some fundamentals no longer hold.
Today, you've got buyers and sellers agreeing on a price only to find that conservative appraisers see the value as much lower. "What's the problem?" you might think. "If the buyer and seller agree, they've got a deal."
If the buyer is paying cash, that's true. But if the buyer needs a bank loan, the bank won't loan more than the appraiser says the home is worth. That means one of three things:
- The buyer must contribute cash -- in addition to the down payment -- to buy the home.
- The seller must lower the price.
- The deal dies.
These days, real-estate agents, homeowners, buyers and economists say lowball appraisals are killing deals and savaging home prices, deepening the recession and making it harder for housing to recover. Post continues after video.
The complaints of lowballing are ironic, since it was only a few years ago that appraisers were blamed for helping create the housing bubble by unrealistically inflating home values.
Back then, banks hired appraisers directly. The problem with that, supposedly, was that some banks pressured appraisers to arrive at higher values for the homes they appraised. Banks presumably wanted higher values in order to lend more money. Appraisers supposedly were loath to bite the hand that fed them. Many see this as a big reason home values became inflated.
The Appraisal Foundation, the standard-setting organization of the industry, places a premium on education, professionalism and ethics. And yet, argues economist Leonard Nakamura, appraisals were biased upward during the boom, making mortgages riskier. Now, a downward bias is creating a mirror problem. Nakamura, an economist with the Philadelphia Fed, wrote a paper last year about the problem of bias in appraisals, "How much is that home really worth?" (.pdf file).
The Wall Street Journal recently picked up the theme in an article that questions the accuracy of appraisals. It touched a nerve, judging from the 276 (and counting) reader responses.
The Journal tells this tale, to illustrate:
Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres, was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale -- one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.
"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size -- as well as the number of fireplaces and its heated pool -- weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.
In an online reader poll, almost 47% of Journal readers who weighed in agreed they'd had experience with a too-low appraisal.
Appraisers, particularly when they're unfamiliar with a locale, can miss important nuances, and value varies greatly from neighborhood to neighborhood.
When the appraiser gets it wrong, agents and bankers can't call the appraiser to complain or tell their side of the story, Wanner complained.
A cure as bad as the disease
To fix problems of inflated appraisals and prevent banker-appraiser collusion, the Federal Reserve Board replaced the Home Valuation Code of Conduct with new requirements that put a wall between banks and appraisers.
But those have created another set of problems:
Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.
The new system is blamed for creating inaccurate appraisals in some cases. The management companies are accused of sending appraisers over too-wide territories, forcing them to work in areas outside their geographic expertise.
An out-of-town appraiser might, for example, not know about the brownfield half a mile away from homes she used as "comps" -- appraisers use selling prices of comparable homes to help establish value -- to value yours. Or she might be unaware of the strong Neighborhood Watch program that earned your block the city's safest neighborhood award two years in a row, which should add value.
The problem -- for owners, buyers and people trying to refinance -- is compounded by automated valuation models now used by banks. These give computer assessments of value that may ignore important components of value. And there's also controversy over the use of foreclosures as comparables when setting a home's value.
According to The Journal:
The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.
"Exceptionally large numbers of signed real estate contracts fell apart last month, failing to reach settlement," writes Kenneth Harney at The Washington Post. Among the reasons: lowball appraisals.
But the Mortgage Bankers Association, the article says, supports conservative appraisals.
And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.
Correction: This post had incorrectly described The Appraisal Institute as the certifying organization for appraisers. The Appraisal Foundation, not the institute, sets the standards used by states to certify appraisers. Also, the post had said, incorrectly, that the Home Valuation Code of Conduct had been revised. The code actually was replaced by the Federal Reserve Board's Interim Final Rule on Oct. 18, 2010.
More at MSN Money:
We appraisers are sinking financially these days too, and the reasons are myriad, i.e., low fees from AMCs, regulatory and client changes, and a lack of work. Did you know an appraiser can be blackballed from being used, without any reason given? Many appraisers have left the market, and others are drowning. If you want to blame something or someone, blame broken systems that allowed subprime loans, homes being used like an ATM machine for re-financing, and plain old-fashioned greed all around.
It boils down to two disparate points. The seller is wanting to get a price at or above its previous value. The buyer is shopping PURELY for monthly payment. With the current interest rate it is much easier to get to that payment at a higher purchase price than from say 2001. The problem with the author's analogy is that the real deciding factor over price and value is what the financial institution can (or believes he can) recoup in foreclosure. Recent history tells lenders to be more conservative.
Few if any of us (except for the real estate agents whose income is a percentage of the sale price) would disagree that the values a decade ago were terribly inflated. Real estate agents are blaming poor sales on "tight credit" when in fact credit is just as available for a sale at a more historically accurate appraisal (IE more in tune with inflation) with the last decade's housing boom discounted. The problem is sellers cannot or will not sell at that point that erases all or most of the equity they have earned through years of dilligent payment.
Bankers are indeed driving the prices down. They spent over a decade living on fees of one kind or another. The government put a stop to that. In the current environment loans must produce and the sale of foreclosed properties need to indeed cover the amount of the lein. The current selling prices don't provide that.
The bottom line as painful to the sellers as it is, is that the prices still are between 10 & 15% TOO HIGH versus the 20-year inflation cycle.
This article is dead on. I have written to our politicans on this exact issue and they continue to ignore the problem. I hear and read about this from many people. We had a contract for our house for a fair price considering the market. The buyers sold their house and the appraisal came in $12K under their buyer's contract. They lost their sale. So six real estate transactions were lost over one appraisal that came in 5% low.
All of these lost transactions was due to one appraisal. No one person should have that much control over a real estate sale. It is a dictatorship and the appraisal can not be questioned since nothing will change according to the relators I have talked to. The process is broken and the real estate market will not recover until the appraisal start being more realistic.
Yes, it happened to me! I bought the house for $117,000 on 1993. the house is appraised at $196,000 on 2012 by an appraiser with new roof,two new a/c and new windows and doors. The bank loaned me $ 156,000.00 after checking my employment status till day when they made the deposit in my bank account.
Most everybody involved, except the buyer, has an interest in inflating the price or "value" of a home. The realtor for the commision (let alone not allowed to disparrage a property). The appraiser, though likely neutral, may point out everything that is wrong with a property, doesn't mean (he) can't still overstate the value. And naturally the seller wants as much as he can get, especially if they were flipping it (oh that's a mess!)
Appraisals killed todays home sales by over-inflating the homes when the market was "smoking crack!"
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