Are Falling Home Prices a Symptom of Low Appraisals?

Along with predatory lenders, ignorant homebuyers, and greedy investors, overly optimistic appraisers have been one of the main targets of those looking to mete out blame for (the collapse of) the housing bubble. Specifically, appraisers have been criticized for their lofty valuations, which may have contributed to “excessive” house price inflation. Appraisers counter that they were only doing their job, and that the real blame lies with the lenders that pressured them into simply confirming sale prices in order to make sure that deals closed.

Now, however, the pendulum may have swung too far in the opposite direction, such that appraisers have suddenly become overly conservative. Again, the appraisers blame the lenders, who this time around are driving appraisal valuations down in order to make sure that they don’t lend more than the home is actually work. “In some cases, lenders are requiring that appraisals be based on sales closed within the past three months rather than the prior six-month norm, appraisers said. Some lenders are also asking for comparisons with at least one sale in the past 30 days.” Also faulted is the new mortgage appraisal system, whereby home valuations are performed by appraisal management companies. While the change was supposed to prevent banks from directly pressuring appraisers by placing a buffer between them, the actual result was to commoditize the appraisal and drive down quality.

A similar trend can be seen in the rise of Broker price opinions, or BPOs, which “are performed by real estate agents who, unlike licensed appraisers, have no regulatory oversight of their valuations. BPOs are attractive for lenders because they cost between $40 and $65, compared with about $350 for an appraisal.” Meanwhile, since the agents have also been engaged to sell the property, they are incentivized to keep prices low, in order to maximize the chances of a sale. [It should come as no surprise that BPOs are illegal in 23 states].

The result is that appraisals are still leading the market, only this time around they are tugging prices downward instead of dragging them upward. Naturally, homeowners are furious. “When the homes are then sold at ‘fire-sale prices,’ the rest of the neighborhood suffers, especially in areas with clusters of distressed sales,” which is causing prices to fall across the board. Some home-sellers are being forced to drop their prices at the last minute in order to hold onto buyers with appraisal contingencies built into their mortgage contracts.

Homebuilders are also suffering since banks will no longer approve mortgages for properties that are determined to be overvalued, with the result that some new homes are being sold below cost. Meanwhile, those looking to refinance or take out home equity lines of credit are facing an uphill battle. Appraisals are coming in so low that creditworthy borrowers are being rejected outright for refi’s and/or watching the bank freeze their LOCs.

The keys to making sure that you get an appraisal that you’re happy with is to understand how the appraisal process works and then to double check the final report for errors. Most appraisals use a weighted average of the estimates from a sales comparison approach, income approach, and cost approach. Begin by making sure that comparative sales are actually comparable, and that there are not a couple of questionable homes dragging down the average. From a cost perspective, make sure that the appraiser took accurate stock of your home. For example, did he factor in all of the rooms and all of the renovation work you have completed recently?

In the end, unfortunately, appraisal is more of an art than a science. In other words, prices are constantly fluctuating and your home’s “true” value might be different yesterday from tomorrow. Really, a home, like anything else, is only “worth” what somebody else is willing to pay for it.