Wednesday, July 8, 2009

What's a home worth?

What's a home worth? That is the biggest topic in Real Estate this week has been what the actual value of a home is to an appraiser.

Most buyers are unaware of an industry change in the home appraisal process that has begun stalling sales in many areas. The changes in appraisal rules have home sellers and real estate agents now find themselves fighting inaccurate home value appraisals in a tough market and making it even more difficult to sell.

The biggest issue is under an industry code of conduct that took effect May 1, mortgage brokers, real estate agents and loan officers are prohibited from selecting home appraisers. This has resulted in appraisers that are from outside an area pricing homes without local knowledge.

In a place like Alameda, a block in one direction can add or subtract value because of the neighborhood, schools or housing stock. An out of the area appraiser would not have that local knowledge.

The new rule was put into place because past practice of agents and mortgage brokers-who only make money when home sales and refinancing are completed pressured appraisers to modify estimates. There’s little doubt there was collusion nationwide in past years between some appraisers and lenders, which led to abuse and resulted in the new rules.

In order to avoid violating the rule that applies to mortgages that will be sold to Fannie Mae or Freddie Mac, called the Home Valuation Code of Conduct, many lenders are hiring companies that put together pools of appraisers and then assign them to individual housing transactions.

Real estate agents and mortgage brokers say the pool of out-of-area appraisers has led to an increase in questionable or low valuations by appraisers who are leery of producing estimates that are too high. Those appraisers from outside the housing market and unfamiliar with the nuances of neighborhoods to which they’re sent are being very Conservative.

National Association of Realtors chief economist Lawrence Yun said the appraisal problem is serious. “Lenders are using appraisers who might not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment.”

Home appraisals that come in at lower-than-agreed-upon sale prices can kill deals and at the very least they could delay sales as the home buyer and agent working on details to rework the deal. From what I have been reading appraised values has been tough for high-end homes for which there now are few recent comparable sales.

This is just one more element that could delay the housing market recovery and increase foreclosures if appraisal problems are not quickly corrected. My suggestion is that if you believe a valuation is low on home that you are selling that you hire a local appraiser to get a second opinion.

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  1. happy home ownerJuly 9, 2009 at 7:53 AM

    I think this is a great trend. Overinflated appraisals were one of the causes of the housing collapse in the first place. It made it much too easy for folks who shouldn't get a loan get one anyway. When I refinanced my house the appraiser didn't even bother to come inside, spent all of 2 minutes on site and gave an outrageous valuation.

    The distressed sales in my neighborhood are certainly going to impact the value of my houses, so why shouldn't they be taken into consideration?

    Of course real estate agents are going to complain about the situation since appraisals grounded in reality are going to make their job harder. I am disappointed that you also seem to favor an approach that encouraged appraisers to over value property, which would lead us right back into trouble again.

  2. would-be home buyerJuly 10, 2009 at 9:00 AM

    You say: "This is just one more element that could delay the housing market recovery"

    I think it's actually the other way round; a recovery in terms of number of homes sold only happens when prices are realistic and affordable. These new appraisal guidelines will hopefully set prices more objectively than a "my neighborhood is oh-so-special" local drive-by appraiser. Look at the number of $550k 80 year old delayed-maintenance shacks on Alameda's MLS - a realistic appraisal might help pricing these correctly one day and move some inventory.

    As for recovery in terms of prices going back to bubble levels, that is only going to happen with the help of serious inflation.