Are Appraisals Keeping Pace with the Market?

Are Appraisals Keeping Pace with the Market?

Published: Jul 26, 2013

The Great Debate:  Are Appraisals Really Keeping Pace with the Current Real Estate Market?

With momentum on their side, home buyers -- including a growing number of international and institutional investors -- returning to housing markets are bidding up prices for a tight supply of listings and causing significant growth in some markets.  Lawrence Yun, Chief Economist for the National Association of Realtors (NAR) said, "Some of the previously hard-hit markets like Phoenix, Sacramento and Miami continue to experience a dramatic turnaround, while a new set of areas like Atlanta, Minneapolis and Seattle have begun to show strong signs of upward momentum.”

Yet, despite this welcome trend in many, but not all areas, some feel appraisals still come in too low and are not keeping pace with appreciation in certain markets.

Lagging Data or Cautious Optimism?

With sale prices rising in many markets the last six-to-twelve months, there has been rising sentiment that appraisals might be caught in a time warp and may not always accurately support values negotiated between buyers and sellers. This may be especially true where property values are increasing and data available to appraisers may not provide support for higher values. Some feel that appraisers may prefer to be on the low end, and not get into trouble, than be on the high end and be wrong.

NAR’s Yun went so far as to relay that poor appraisals were “stalling transactions” and "some contracts are falling through from faulty valuations that keep buyers from getting a loan.” He cited that NAR was flooded with e-mails and telephone calls on the appraisal problems.

Chris Heller, agent-owner of Keller Williams Realty in northern San Diego, told CNN that problems with the appraisal process have caused about a third of his transactions to fall apart.

According  to May 2013 NAR statistics, approximately 32 percent of respondents reported having appraisal problems in the past 3 months.  About 9 percent of respondents reported a contract cancellation due to appraisal issues, 10 percent of respondents reported a contract delay, and 13 percent of respondents reported a lower price renegotiation.  The good news is that this was down slightly from a steady trend for the six month period from June to December 2012 of approximately 35 percent reporting appraisal problems -- and a 10 percent trend of cancelled contracts due to appraisals.

Still, as more information becomes available, appraisals are expected to catch up with some of the more active real estate markets. According to NAR in a recent CNNMoney article, as home prices climb and housing inventories shrink, some appraisers are now valuing homes at or above their selling prices.

Institutional Investors Creating Market Waves

In appraisers’ defense, some feel the housing market may not be as strong and robust as the hype leads one to believe. According to the Wall Street Journal (WSJ), “institutional investors have been spending billions of dollars buying up single-family homes en masse.” In 2012 alone, institutional buyers purchased about 138,540 of both distressed and non-distressed homes in the U.S., or about 3 percent of all sales, according to RealtyTrac. 

This uptick is creating concerns that real estate may be headed for another bubble in areas where housing-price gains may not be sustainable -- especially if unemployment remains high, interest rates start rising, selling prices peak and investors quickly unload their holdings in bulk, depressing home prices. And with about 26 percent of all homeowners nationwide underwater in their mortgage and another 850,000 actively in the foreclosure process, a large shadow inventory may keep a lid on markets, according to RealtyTrac.

So are appraisers slow to respond or simply being conservative based on certain market fundamentals not keeping up with recent gains?  Bill Garber, Appraisal Institute Director of Government and External Relations, supported appraiser results on-line, stating: "Appraisers provide lenders with information that protect them from making questionable loans and investments and helps them minimize risk.”

Further, Richard Borges, president-elect of the Appraisal Institute, in speaking with, the nation's largest publisher of mortgage and consumer loan information, said many find fault with an appraiser if an assessment comes back lower than the price the seller and buyer negotiated. He said appraisers provide “unbiased, impartial, independent, objective knowledge about the market and the particular characteristics of the property.  This means appraisers should not assess a dollar amount solely to make sure a real estate deal goes through,” he says.

What's Ahead?  The Crystal Ball is Still Too Cloudy to be Sure

The national median existing-home price for all housing types was $208,000 in May, up 15.4 percent from May 2012. This marks six straight months of double-digit increases and is the strongest price gain since October 2005, which jumped a record 16.6 percent from a year earlier. The last time there were 15 consecutive months of year-over-year price increases was fromMarch 2005 to May 2006. Interestingly, some of the largest gains were in markets that experienced the biggest declines during the foreclosure crisis-the very places that have attracted some of the most intense institutional interest.

“Investors are really getting back into real estate,” says Connie Pearson, Director of Operations at NEI Global Relocation. “Marketing homes aggressively to keep them out of inventory is a top priority for serving clients. We’ve had sellers reduce the sale price to match lagging appraisals, especially for FHA and VA financing.”  Connie also has seen multiple offers and offers over list price on properties in certain rebounding markets such as California and Texas. “Appraisals are starting to catch up, but may have more to go, as markets lift,” says Pearson.

In parts of Florida, for example, some buyers are amenable to paying above appraisal if the appraisal comes in lower than the contract price. If the seller refuses to lower the price with other bids in hand, they may ask interested buyers to pay above the appraisal -- and many have done so if they feel appraisals have not kept up with what they see.

Sue Carey, Vice President Relocation and Corporate Services, CENTURY 21 Kreuser & Seiler Ltd. Libertyville, IL recently reported being “grateful that many appraisers are looking at sales within the last three months - not six - in an effort to catch the wave here.”  Both she and NEI recommend furnishing resources to appraisers so they have current information on the activity on a seller’s property. “With the seller’s permission, we would encourage our listing agent to provide a copy of the front page (buyer’s name deleted) of each offer received. This may help the appraiser build a case to the reviewer of a market that is no longer in decline, no longer flat, but appreciating,” said Carey.

Even with institutional investors spending billions, which has driven up some markets, and low mortgage rates making buying attractive, such recent activity after a five-year slump could justify the optimism of those who feel the market is coming back.  Regardless of where it’s headed, with more activity, finding recent sale prices for comparable homes may become a bit easier going forward as agreed upon prices between buyers and sellers are more likely to be aligned with appraisals in more markets.