Appraisals Haunt Housing Recovery

     The conditions of the current housing market should be very appealing to buyers and sellers alike. However, we are noticing that a lot of people out there are very hesitant to make the move right now, whether that move is buying or selling. This post will focus mainly on the potential sellers who are being scared into staying off the market, and for good reason. First off we saw a fear in listing because of the major losses taken by anyone who owned a home throughout the housing collapse. Home prices dropped dramatically beginning in 2006/07, as we all know, which means that many people who would list now will begin the process at a loss in value from their original purchase. However, there is now light at the end of the tunnel which we have been seeing for quite some time now. We have seen consecutive months with increasing home prices, more and more homeowners who were underwater are getting out, the amount of foreclosures out there continue to set record lows since the collapse, and we are beginning to see a future in Real Estate again. There are even some projections saying that home prices could witness a full rebound to their prices back in late 2005 by the year 2015. The future is definitely bright for homeowners, however one big issue is causing hesitation for potential sellers in the present; that issue is appraisals. “It’s holding sellers off the market,” Jed Smith, NAR’s managing director of quantitative research, told The New York Times. “Sales volume could probably be an additional 10 to 15 percent higher if we had normal lending practices and if we had normal appraisal practices.” More than a third of real estate agents have claimed that appraisals have been responsable for cancellations, delays, or renegotiations to a lower price. The NAR has spoken about this topic, claiming that appraisals are holding back the housing recovery.

     Now that you can see what the effect is, let me elaborate more on the cause. Appraisals are haunting potential sellers in a few ways. An increasing amount of real estate agents have been including contingencies in their contracts stating the amount a buyer is willing to pay if the appraisal comes in lower than the agreed upon sales price. I have personally been subject to this particular contingency and I can tell you that my client was not happy when I explained the contingency to him. My client's reaction was simple, "your telling me that we all agreed upon a price, yet if the appraiser gives a lower estimate then we have to change our agreement?" My Client continued by asking me, "then what's the point of negotiating in the first place?" The reason for this contingency is because appraisals have been coming in on the low end, which benefits the buyers, but not the sellers. Appraisers have been criticized for using foreclosures as comparables as well as failing to take into account market conditions such as low inventory and bidding wars in a lot fo areas. Another reason, states NAR, is that banks have increased their appraisal requirements to 6 comparable homes, as opposed to the previous requirement of 3. At a time of low inventory, this increase to 6 comparables just does not have any benefit.

     Although this needs to change, the appraisers are not to blame. Increased regulation on banks and lenders has caused much concern in giving out mortgages. The banks and lenders have been told by the current administration that they can only give out "qualified" mortgages or loans or else they are subject to penalties. However, the administration has yet to come forth with a specific definition or guideline to describe the term "qualified". Therefore, lenders are hesitant and very critical when qualifying someone for a loan, hence the requirement increase to 6 comparable homes for the appraisals. There definitely needs to be some kind of regulation on lenders so that we do not borrow our way back to another recession, however the current policies are simply not cutting it. There needs to be more clarity for the lenders and less fear of doing something wrong. We want this housing market to move forward like it could be doing instead of remaining stagnant.