Last month I talked about the greatest force driving our market, which is inventory, or more specifically, the lack of inventory. As long as there are more buyers than sellers, there will always be an upward pressure on prices, and that’s definitely what we’ve seen on the plateau in the first five months of 2013. There is something that is offsetting that pressure, though, and that is the appraisal process.
Unless a buyer is paying cash, the lender is going to require that they get an appraisal on the property to make sure that it is worth the amount the bank is lending. That’s always been true, but in the accelerated growth years of 2004 through 2007, those appraisers were operating under a different set of rules than they are today. During those years, banks were looking for any reason to be able to loan money, and the appraisal process reflected that. It was almost always possible to price a home at a value higher than an appraiser could “prove” through the use of comparable properties.
When the sub-prime mortgage market crashed and brought down giants like Washington Mutual, the ripple effects extended into almost every area of lending, including appraisals. Today, it is much more difficult to get a property to appraise when it is priced higher than easily provable values, even if there is a well-qualified buyer prepared to pay that price. I have seen more issues with low appraisals in the last six months than I have in the previous 10 years combined. When an appraisal comes in low, there are a limited number of options available: the seller can lower their price to match the appraisal, the buyer can make up the difference between the appraised value and the offered price in cash, or the parties can walk away.
Are these appraisal issues a good thing or a bad thing? That depends on how you look at it. If you are currently a seller and are trying to maximize the amount you receive for your home, it’s probably a bad thing. On the other hand, those old appraisal practices were a part of what led to the “irrational exuberance” (to quote Alan Greenspan) and rapid escalation of home prices in the mid-2000s. Using more stringent appraisal standards will go a long way to ensure that banks are not making the large numbers of bad loans that led directly to the economic issues associated with the collapse of the real estate market.
Next time around, I’ll take a look at what your options are if you are currently “under water” in your home and what the Short Sale process looks like in 2013.