Are appraisals the problem with the real estate recovery?
August 12, 2011
7 Comments
NAR(National Association of Realtors) is at the center of the latest blame game on real estate recovery. It started with the July release by NAR, June Existing-Home Sales Slip on Contract Cancellations, but Prices Stabilize.
NAR’s chief economist Lawrence Yun is quoted saying, “Home sales had been trending up without a tax stimulus, but a variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” he said. “The underlying reason for elevated cancellations is unclear, but with problems including tight credit and low appraisals, 16 percent of NAR members report a sales contract was cancelled in June, up from 4 percent in May, which stands out in contrast with the pattern over the past year.”
This mention of the low appraisals sparked an article by the WSJ, Judgement Call: Appraisals Weigh Down Housing Sales. Last I checked there were 195 comments and counting.
The story is all very simple really. There has been no economic or housing recovery. The overall opinion is that there will be no economic recovery until there is a real estate recovery.
For those that actually have jobs and may wish to buy homes, most are dependent on getting a mortgage. According to NAR 16% of the homes under contract in June fell out, citing problems with tight credit and low appraisals. I don’t think these are mutual exclusive, but he mentions them both.
The real rub is that both sellers and buyers are blaming the appraisers if the property doesn’t appraise for contract value. Isn’t the value of the property what someone is willing to pay for it? Of course it is worth what someone is willing to pay for it, but that doesn’t mean that a bank needs to be willing to lend on what two other parties agree to on property value. This is the real issue.
The bank is lending money to the buyer so the home can be purchased and probably pay off another bank. Maybe the seller gets some equity, but probability of that is low in the current market.
Note to everyone in the real estate game: You can complain about the appraisers not knowing the market or cheap fees are causing bad appraisals. You can complain about a mirad of items regarding the appraisers. However, the reality is that there really isn’t anything that can be done about the appraisal system. Much like our banking system……
At the end of the day, an appraisal is not really what a home is worth, it is the value in which a bank will lend money against. Of course the banks are being more careful – They are still stuck with a ton of bad loans post-Lehman and taking the majority of the heat for the real estate bust.
I am no fan of the banks, but at the end of the day it is their money being lent. If the sellers and buyers want to transact, then there are a number of steps that can be taken:
1. The buyer can put up more of a downpayment. The buyer can pay whatever they want – The appraisal will determine how much they can borrow.
2. If the buyer can’t put more down, then the seller can take less. (If they can actually afford to take less…)
3. The Realtor, buyer, and seller can contest the appraisal. Everything I have dealt with or read about says that this is near impossible, but I have heard stories of people being able to do it.
The road to real estate recovery will be extremely long. During this time there will be a lot of blame to go around. If you want to buy or sell real estate in the current market the reality is that you need to be patient, because there is no quick fix.
Well stated Mike. After I read the WSJ article, my blood started to boil (again). Buyer’s and Seller’s do determine value, but if you want the banks money, then you have to follow their rules. They have their own guidelines on how they want appraisals done (scope of work), if you want the money follow their rules-simple as that. It’s as if borrowers feel they have a right to the money, and they don’t like being told “no.” It’s seems like a no win situation-appraisers were too easy, now they’re too tough.
Michael
It’s not a perfect system and I agree that it currently is a no win situation for appraisers. Because so much is being pegged to the appraisal that is who will get blamed if it doesn’t work for the deal between buyer and seller.
The appraisal historically looked backward at comparable sales prices. Today’s appraisals are looking forward and discounting prices accordingly.
Being patient has been great for buyers, but bad for sellers (as they chase a declining market).
Sellers need to realistically price their properties based on 2011 economics. Please take a look at the Case-Shiller index in their area. Too many sellers are stuck in 2006 prices, thinking their properties are unique.
So what ends the vicious cycle? Only cash buyers or those with 50 to 60% to put down?
Happy to see you are doing well, Mike.
I think the problem started when the Attorney General of New York started dictating how appraisals should be done by pushing the HVCC down the throats of Fannie Mae and Freddie Mac. When you have appraisers traveling from 60 to 100 miles away to do appraisals there are often just bad appraisals. The biggest problem is the bank asset managers who take an all cash offer because they don’t want to risk an out of area appraiser giving a low appraisal. In Danville CA, a property had multiple offers and even though the financed offer was $250,000 greater than the all cash offer, the all cash offer was awarded the contract. This does more than just impact the neighborhood comps but it also reduces the property taxes. This is just one of the negative impacts of Appraisal Reform.
This article is right on. Buyers and Sellers have to understand the banks and lenders are leading the market for better or worse. Unless a property is sold for cash, then and only then, can the agreed contract price be the final sale price in most cases. Educating both buyers and sellers upfront regarding an appraisal value for a property is very important to making a deal go through. This is were the Realtor plays a major role.
I agree with all of the comments.
1. I don’t think cash or 50 to 60% down is the only answer. I think sellers need to be prepared to take what a property appraises for or need to wait it out. There is 80% LTV mortgages out there, but it ultimately comes down to the appraisal.
2. I completely agree with Frank on the historical and now looking forward. We have had this hurt us in the auction business on a short sale. Appraiser was from 180 miles away and had properties that the homes were comparable, but area of town was not. On top of it, he told us how he was looking forward one year and anticipating the market to improve. No matter what I said I couldn’t get him to remove his head from his you know what…..
3. I literally find Ann’s example shocking. Those types of scenarios aren’t good for anyone.