May232013

Appraisers complicit in efforts to reflate the housing bubble

Appraisers are supposed to be impartial third-party arbiters of value. If appraisers do their job right, prices can’t get out of control and rise too rapidly. For quite a while, this system worked. However, probably on instruction from lenders, appraisers are now “hitting the number” and ceasing to be a brake on home price appreciation.

Lenders want prices to go up. Appraisers are ostensibly there to protect lenders and buyers by ensuring loans and prices are in line with prevailing values. However, since lenders do want prices to go up, they aren’t coming down on appraisers when the appraised value has little or no bearing on reality. At this point, as long as prices are moving higher, banks don’t feel the need for protection, so appraisers are giving them what they want — appraisals that allow prices to move up rapidly.

Home appraisals no longer derailing sales

By Les Christie @CNNMoney May 15, 2013: 9:14 AM ET

Notice the spin in the headline. I imagine this headline is cheered by realtors and homebuilders who used to get their deals killed when the price was ridiculous. The abdication of responsibility by appraisers is being touted as a good thing. But is it really?

NEW YORK (CNNMoney)

Consider this one more sign that the housing market is heating up: Appraisers are putting higher values on homes again, allowing for more deals to go through.

I consider this a dangerous sign that we may inflate a new housing bubble. Reflating the old bubble by bringing values up to stable levels of affordability is one thing, but if prices push higher than that, then we are inflating a new bubble that will end badly. How will lenders know when to stop? And with government backing, will they care?

During the housing bust, sales were often derailed by low-ball appraisals that fell far shy of a home’s selling price.

Low-ball appraisals? I think he means to say that appraisals came it at comparable value when the contract price was ridiculous.

For example, if a home cost $500,000 and required a 20% down payment of $100,000, the buyer would need to finance $400,000. But if the appraiser valued the home at $450,000, the buyer would only be eligible for a $360,000 loan — making the home too costly for some buyers.

Well, if the house was only worth $450,000, the buyer should be thankful that the appraiser killed the deal and prevented them from foolishly over paying.

But now, as home prices climb and housing inventories shrink, appraisers are valuing homes at or above their selling prices, according to Lawrence Yun, chief economist for the National Association of realtors.

Only a realtor would think this is a good thing.

Between 2008 and 2010, appraisals for more than a third of Seattle-based real estate agent Michael Ackerman’s sales came in below the selling price. So he had to get creative.

“I started pulling out the key boxes at the homes so the appraisers couldn’t get in,” said Ackerman. “They had to call me to let them see the home. I would bring a packet of comparables along and explain what I used to price the home.”

So he set out to manipulate the appraiser and prevent them from being an impartial third-party? Real nice. Very professional.

I should be shocked by how brazenly this realtor admits his lack of professionalism and attempts to game the system, but then again, he is a realtor.

Who cares what comps the realtor used? realtors will select the comps that give the highest possible value regardless of what the market is. Even if the appraiser used the realtors comps, a good appraiser would recognize the realtor’s comps are cherry-picked and adjust them down accordingly.

But now, with home prices posting such strong gains, those strategies may not be necessary anymore.

“I’ve closed 15 homes so far this year and none of the appraisals have come in below the selling price,” said Ackerman.

He was certain a recent deal in Wallingford, Wash. was going to fall through when the buyer agreed to pay $755,000 — well above the average $690,000 other homes in the area had sold for. When the appraisal came in at the full selling price “everybody’s jaws dropped,” he said.

Even the realtor knew this was a stupid contract price and the buyer was overpaying, but the appraiser went along. That is not how appraisers are supposed to do their job. The bank is now underwriting a government-backed loan on an over-market price, and the buyer is getting ripped off. How is that a good thing?

And in some of the hottest markets, appraisals are coming in well above the selling price.

Agent Eric Tan said one appraiser did a “drive-by” of a West Covina, Calif., home he was selling in April.

“He didn’t ask for any comps, to see the inside of the house, or even schedule a time to meet with me. He wrote up the appraisal right at the purchase price,” he said. “I was able to sell the client’s home for about $40,000 more than I thought the appraiser would value it.”

For as much as I would like the fault the appraiser, asking the realtor for comps is generally a pointless waste of time. Appraisers know better how to do this than realtors do. And why would the appraiser want to meet with the agent? So he could hear a barrage of bullshit?

In Jacksonville Beach, Fla., where prices have soared 15% over the past 12 months, agent Cara Ameer was “holding her breath” when it came time to get an appraisal on a two-bedroom townhouse she sold for $5,000 more than its $189,000 asking price.

“It was FHA financing and [the FHA is] typically much more strict,” she said. That appraisal too ended up coming in above the selling price.

Great! The US taxpayer is backing loans with 3.5% down with inflated appraisals. As a taxpayer who is ultimately liable when loans like this go bad, I am not happy about this kind of behavior.

Appraisers are quickly losing their objectivity. While this may have limited danger while affordability is high, once we enter new bubble territory, this behavior will be very costly. And since these are all government-backed loans, you will be asked to pay the bills.