Thursday, June 25, 2009

Realtors v. Appraisers

In the National Association of Realtors' press release for May Existing Home Sales, Chief Economist Lawrence Yun included some opinion:

[T]he increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.

Yun said the appraisal problem is serious. “Lenders are using appraisers who may 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. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

"Faulty Valuation" evidently means that the appraiser didn't value the property the way the seller, or seller's agent, was hoping it would be valued.

In the past few months, 45+% of existing home sales, nationwide, have been "distressed"--REO, foreclosures, short sales. In May this number dropped to about 1/3 of all sales. But Yun seems to hope that these will not impact what he calls "traditional" sales--seller to buyer. Really?

As one would imagine, the trade association for appraisers answered the trade association for real estate agents.

"Statement from the Appraisal Institute in Response to Lawrence Yun:
"

"We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.

"It should be pointed out that neither the buyer, the seller, the Realtor nor the builder is the client of an appraiser in a typical real estate transaction. In transactions where buyers are seeking loans, our clients are the lenders. Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don't act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately help ensure that lenders loan the proper amount, buyers don't pay too much and sellers get a fair price.

Read the rest of the statement here.

Mr. Yun's commentary on "traditional" versus "distressed" sales combined with blaming a procedure undermines his credibility. It makes it seem he is unfamiliar with financial experts and economists and banks and investment entities, and Harvard pundits, who put out many projections indicating that "untraditional" sales will be part of the market place for years to come.

See:
Harvard's Joint Center For Housing Studies: State of the Nation's Housing, June 2009
Press release.
Fact Sheet.
The Report.

T2 Partner's: "An Overview of the Housing/Credit Crisis and Why There is More Pain to Come" here.

An explanation of some complaints are reported in an article from Bloomberg:

"The new guidelines require lenders to order valuations through third-party vendors called appraisal management companies that increase costs to prospective home buyers.
Appraisal management companies hire valuators who use automated systems and work at a discount, instead of experienced appraisers who have knowledge of neighborhoods and include factors that can increase a property’s value, such as home improvements or proximity to schools," said a critic of the system.

Read more of the article from Bloomberg.

The "new guidelines" the article refers to = The Home Valuation Code of Conduct, which went into effect May 1. PDF here.

The WSJ also covers the issue in What's With All the Moaning About Home Appraisals?

Calculated Risk gives an overview of how the HVCC came about and appraisals, in a piece about inflating values by the expert Tanta, who was a mortgage officer before she became a much-beloved and central blogging voice of the mortgage meltdown before her recent early death. Read here.

NYTimes Senior Financial Correspondent Floyd Norris weighs in on Yun's blaming appraisers:

"It sounds like the banks — the ones who loudly demanded that they be allowed to ignore “distress sales” when valuing mortgage-backed securities — are considering such sales of houses when they make mortgage loans. Given that a significant part of the housing problem was caused by appraisers who signed off on exaggerated home values, it takes a lot of nerve for the realtors to demand that appraisers now ignore market prices in order to let them sell houses. “Distressed and discounted” sales are real, even if they are inconvenient."

Read the rest of Floyd Norris here.

Bolding, italics ours.

20 comments:

Buyer said...

NAR's and NAMB's lobbying efforts to delay appraisal reform, from Ritholtz:

http://www.ritholtz.com/blog/2009/06/nar-namb-fighting-appraisal-reform/

Lobbying letters

http://www.ritholtz.com/blog/2009/06/dastardly-real-estate-lobbying-letters/

Dave Phillips said...

I would suggest you are making the problem sound more simplistic than it is. Getting a correct appraisal is the key and to do that appraisers need to use good information. Now, we can argue over what constitutes "good" information, but that's not my point. The new system is assigning appraisers from Roanoke or Richmond to appraise Cville properties. These appraisers do not even have access to the MLS much less have knowledge of local market. The random assignment of appraisers is a good idea, but there should be some standard for knowing the local market.

As to using distressed sales as comps, that is okay, but a non-distressed is more valuable than a distress sale because of time and aggravation costs. If you are not willing to wait months to get your offer accepted, you will have to pay extra. Frankly, not dealing with the hassles of a distressed sale is very valuable to me.

Anonymous said...

Wait a sec. Are you saying that an unsold foreclosure or short sale would be used as a comp?

It's the sold comps that give valid info. Not listings.

What am I missing?

Melanie said...

We just purchased a home that appraised for $5000 more than the list price. However, we were looking at a financing option where we would have paid more than the house was listed at to get more money at closing. That scenario would not have worked out for us, but we realized that risk and chose not to go that direction early on. I thought the appraiser made a fair assessment, and the house was priced well for the area and the current economic situation.

Anonymous said...

I guess if CAAR (NAR) knows that appraisers don't have access to the MLS and they want sales to go through, they'll grant access.

Some fresh eyes on Cville from Roanoke or Lynchburg can only make the pricing correction accelerate in this area.

It doesn't seem like sellers are getting more realistic. Maybe some sales that don't go through will foster accurate valuations. That is, pre-2006 pricing.

Dave Phillips said...

Anon,
The MLS access is available to these appraisers (for a standard fee), but many of them are asking the listing agent (or buyer's agent) to provide comps. As to fresh eyes, I think you are a bit off the mark. I understand what you are saying about sellers needing to get real, but appraisers do not set market prices. They determine what the market is saying and if they are not familiar with the area, they may use a Belmont comp to justify a higher price in Greenbrier. Seller's will get real when they need to sell. They have to live by the market says just like buyers.

Anonymous47 said...

Sorry, but that makes no sense. First, the appraiser should be familiar with local conditions. Second, why do you think properties in Charlottesville cost more than those in other areas? Location.

If you think the values are better in those other locations, why not buy a house in one of them?

Anonymous47 said...

Anonymous said:

Some fresh eyes on Cville from Roanoke or Lynchburg can only make the pricing correction accelerate in this area.

Sorry, but that makes no sense. First, the appraiser should be familiar with local conditions. Second, why do you think properties in Charlottesville cost more than those in other areas? Location.

If you think the values are better in those other locations, why not buy a house in one of them?

Anonymous too said...

Why do appraisers need MLS if they have access to sold properties on the county website?

And shouldn't an out of town appraiser be able to apply the same appraisal standards to arrive at a similar judgment? That is, if current appraisal standards are dependable.

Real C'ville - The Bubble Blog said...

Below is a link to an article where an appraiser is describing the HVCC issues, from Clusterstock. The basic conclusion: banks haven't had any "skin in the game" for a couple decades. They gave up using their own appraisers when they no longer held mortgages. Since banks are keeping Jumbos on their books, they have a renewed interest in accurate appraisals.

Dave, we're not being "simplistic." If anything, Yun was simplistic in the press release, where he makes the assertion that there is a difference in "kinds" of sales.

Since VAR is collecting "war stories," no doubt all state associations are; the lobbying to change the HVCC can continue.

Melanie, wondering if your appraisal occurred before May 1?

Anonymous47, one reason properties cost more in Cville is location, that's true. But it's also because, as per The VHDA, the market hasn't corrected yet. Even you, cheerleader for the $600-$800K price point, must realize that the supply of those houses is far above demand.

http://realcville.blogspot.com/2009/06/housing-hallucination-unsold-turn-it.html

Anonymous too: The County website has a lagtime in reporting sales prices. The City's website does not have the capacity to report sales other than individually, and there's an even greater lag time.

City: realestate.charlottesville.org
County: gisweb.albemarle.org

Link to above-mentioned appraisal article:
http://www.businessinsider.com/why-new-regulations-havent-fixed-home-appraisals-2009-6

Jim Duncan said...

One quick note about appraisers' familiarity with the market ... if they don't know our market they are not qualified (IMHO) to do appraisals here (or anywhere) ...

Example:

- A house this year in the City was under contract for $200k*.
- Appraiser put it at $180k
- Comps used were from a vastly different neighborhood - not comparable at all
- Appraiser would not correct the appraisal, so contract fell through and buyers were upset, disillusioned and rented.
- The back-up offer was accepted by the seller and the house closed for very close to the asking price.

Moral: appraiser was wrong, two buyers (and their Realtors) - independent of each other - set the price and in this one instance, the appraiser and the mistake stood in the way of the market.

No one is saying that everything is hunky dory, but we need to at least be honest about the problems, acknowledge them and correct them.

I've said it elsewhere ... the NAR is suffering from their complete lack of credibility due to their recent history. Is what Yun is saying valid? Certainly to a degree.

Jim Duncan said...

A further point regarding appraisers and MLS access ... at an appraisal I attended last week, the appraiser's first question was "how long has this been on the market"? ... Days on Market matter and it's a shame that they aren't always correct in the MLS (at least the aggregate numbers)

Anonymous said...

Hey I have a question...

On the appraisals for purchases, do the "comps" used state how much a seller had to give up in sales concessions to get the sales price? Are these factored in as sales concessions should not be considered in a property value, right?

Anonymous47 said...

Bubble Blog says:

Anonymous47, one reason properties cost more in Cville is location, that's true. But it's also because, as per The VHDA, the market hasn't corrected yet. Even you, cheerleader for the $600-$800K price point, must realize that the supply of those houses is far above demand.

Characterizing me as a cheerleader for the 600-800 price point is silly. You have no evidence of that. Or maybe you have me mixed up with somebody else.

You are also wrong if you think the market in that price range has not yet corrected. Anybody who is actually involved with the local real estate market can tell you about numerous price reductions and sales prices well below asking prices.

Melanie said...

Bubble-Blog - the appraisal occurred last week. The mortgage officer mentioned that the appraisal had to be assigned randomly, so I think that rule applied to us. They pulled five comparable homes that had sold (two on the same street, two nearby, and one pretty far south from our house), and then evaluated them subtracting for amenities those houses had that our house didn't have and such. The whole report looked pretty accurate and well-researched to me (but I'm just an average Joe homemaker). There were pictures of the other homes and a few maps showing where they were in relation to the house we bought. I looked up the appraisal company and it turns out it was in Charlottesville. Of course we are buying at the low end of the market, not the $600,000-$800,000 range, but it appeared to me that the appraiser did their job.

Real C'ville - The Bubble Blog said...

Melanie, thanks for providing info. You are affirming what Jim and Dave are observing about appraisers--that a local appraisers is likely to appraise the house as per market.

Anonymous47, we're basing your price point interest on previous comments.

We are well aware that sales prices are below asking prices. Asking prices often remain unrealistic, however (see 6/30 post), which can deter buyer interest.

As for the pricing correction in this area or nationwide? It's not over, no matter what the price point.

If you think it is, please provide links to any information you have that indicates housing will not continue to decline in this area or nationwide. And please provide data that indicates housing values, once bottomed, will be anything but "L" shaped for years to come.

Both buyers and sellers will be very interested in this information.

Anonymous 3:25, Jim will weigh in on this.

Jim, thanks for the concrete example of a derailed sale. & Unfortunately, you're right about NAR's credibility.

Melanie said...

I think that housing prices probably will continue to decline for sometime. I guess I just wonder if it will stop mattering at some point. For example, my MIL bought at the top of the housing boom and now her house is likely worth less than what she bought it for. But, if she moves (for example, to change jobs or be closer to grandkids) she will be able to find plenty in her price range to choose from - she just has to find another buyer in a similar relocating situation. Even so, I don't think it is too surprising that sellers that purchased in 2006 would want to price their house too high. Putting yourself in a situation where you would lose money, even if only briefly, is a scary position to be in. That Real Estate Intervention show is a real window into that situation.

For our situation, we looked at several houses that had been on the market for over a year that were priced higher than the house we purchased. Those houses were priced near/below tax assessment. The house we ultimately chose was only on the market for 17 days. It was closer to town, newer, and cheaper-but also priced near tax assessment. Again, maybe this is because we were looking under $300,000. The bottom line was that we chose a home based on location, maintenance, and price - regardless of tax assessment. I guess that is what any buyer would do.

Anonymous47 said...

Bubble Blog said:

Anonymous47, we're basing your price point interest on previous comments.

We are well aware that sales prices are below asking prices. Asking prices often remain unrealistic, however (see 6/30 post), which can deter buyer interest.

As for the pricing correction in this area or nationwide? It's not over, no matter what the price point.

If you think it is, please provide links to any information you have that indicates housing will not continue to decline in this area or nationwide. And please provide data that indicates housing values, once bottomed, will be anything but "L" shaped for years to come.

Yes 600-800 is my price point of interest. But I am not a cheerleader and you have no evidence for your baseless comment.

Second, there has been a significant price correction with reductions in asking prices, and sales prices well below asking. All properties? Of course not. Many? Yes. If buyers are deterred by asking prices, that is their mistake. They should bid low.

Is the price correction over? No, and I never have suggested it is. But it has been going on for some time.

Debaser said...

Real C'ville,

Do you have any data on how long the lagtime is for the city and/or the county reporting sales prices?

Is there any stated reason for the local MLS not providing sale price data? Is that decision reviewed from time to time?

I think the NOVA MLS does provide sale price data but I don't know if their model or the C'ville model is the norm.

Real C'ville - The Bubble Blog said...

A47, Thanks for the clarification.

Debaser, As you know (but others may not) MLS is the privately-owned database of a trade association. That it is even publicly searchable creates consternation in some members of NAR and local Realtor organizations. The data was thought to have to be public to be competitive w/other RE websites.

Have seen some posts (but can't give links) on talk of actually taking MLS private again, rather than going fully public, in order to protect "the service" or "intellectual property." (These posts would most likely have been on Activerain or an agent-focused blog).

Perhaps Michael Guthrie or Greg Slater will weigh in on this (President and Pres. Elect of CAAR, respectively).

Right now, the place to get most accurate and up-to-date info for the Cville MSA is from a Realtor.

RE: lagtime for City: no concrete data.

RE: lagtime for County: we have a guest post this week about using the sales data and time lags. It's anecdotal, but informative.