If you look at my latest market update, it’s blatantly obvious that many parts of the Phoenix area real estate market have shifted dramatically over the last 7 months from a strong buyers market to a strong sellers market.
When you consider how quickly this change has occurred it nearly defies logic, what with as tight as the credit markets are, in the face of a recession, we are seeing new housing inventory get gobbled up at a startling pace (particularly foreclosures). Where financing is practical (homes priced at/below $250,000 and/or properties well below $100,000, purchased with cash) and prices are low (again, primarily foreclosures, in which the banks are willing to sell at whatever price gets a deal done in 30 days), multiple offers above asking price is now commonplace, just like the frenzy of 2005.
What does this have to do with appraisals?
It’s going to take a bit of explanation, but bear with me, I’m getting there. Back in the day, an appraiser was hired more or less directly by the buyer, through the buyer’s mortgage advisor. The cost of doing the appraisal was (and still is) born by the buyer. As a result of who paid the appraiser, in my opinion, they felt some sense of obligation to justify the buyer’s price. Frequently appraisers would work together with the principles in the transaction to help “find the value”, to justify a sales price.
More recently, however, lenders have started to seriously scrutinize appraisals. It is now commonplace for an appraisal to go through an initial review upon receipt, and then later in the underwriting process a complete re-review of the appraisal, closer to when the loan docs are being prepared. In a fast paced market, underwriting may determine that the appraisal is no longer valid, and kick the whole deal out, just days before the buyer and seller are set to close escrow.
As well, lenders that feel an appraiser is too buyer friendly have started black balling these appraisers, removing them from their list of approved appraisers. If we thought appraisers in the past were too conservative, they are now even more conservative, as their own valid concern about their livelihood continues to be in jeopardy. Add to this HVCC, which has distanced the appraiser from both the buyer, buyer’s agent, and loan originator, while at the same time reducing the amount of money an appraiser can expect to earn per appraisal by as much as 50%, and appraisers today are now more conservative than ever before.
Isn’t a conservative appraisal a good thing?
If you are a bank or lender, absolutely it’s a good thing. The point of an appraisal is to mitigate some of the risk that the bank is undertaking, by having an independent party verify the value that a willing buyer and seller have agreed to. However, some properties are themselves not good candidates for a conservative appraisal.
Consider, for example, a historic home in a subdivision with just 50 other similar properties in it’s own subdivision, but surrounded by homes of similar size and age that are not considered historic. I have seen the conservative appraiser assign no value whatsoever to the historic/unique nature of the home. Their viewpoint: no recent comparables justify a higher price for the historic home. Reality: There have been no recent sales of any sort in the historic neighborhood, so there was nothing recent to compare to. I was absolutely mind boggled.
Or consider the custom home in Fountain Hills, where very few transactions are taking place right now, of any sort, much less multi-million dollar custom homes. Getting an appraisal that is fair for the buyer and seller, but aligns with current underwriting guidelines (3 comparables of similar size, within 1 mile, sold in the last 3 months).
As the market pendulum swings, with demand outpacing supply, prices should rise. In fact, housing prices in many parts of the Phoenix should rise substantially, given the strong demand there is. However, I’m concerned that the appraisal process and extremely strict underwriting guidelines that are in place now will result in artificially keeping housing prices lower than the natural marketplace would otherwise bring them to, essentially choking the market, and allowing it to breath.
To be continued…
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The answer to the question posed in your story’s title is: Yes The country’s residential appriasal assignments have now been placed in the hands of New Green appraisers. Experienced appraisers are not desparate enough to the 50% paycut that HVCC created.
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