Changes in Appraisal Standards can affect housing prices

[photopress:down.jpg,thumb,alignright] Very interesting article by Kenneth Harney in Seattle Times today.

Of specific note is this quote from the article, “Some mortgage lenders and relocation companies now expect appraisers to examine a wide range of data they never emphasized during the boom years.”

Last night I had a nice chat with a seller regarding how the appraisal process can negatively impact the price at which his home can sell for, if the purchase is financed.  This is not true of all homes, but it was for his particular home.

When lenders start getting nervous about the future of home prices, they start putting downward pressure on prices, by  requiring that appraisers to be more careful not to overvalue for mortgage funding purposes.  While the “lenders and relocation companies” may be nervous based on something that is not happening in the marketplace of this given house, that nervousness can result in properties not appraising.

When the lender will only fund 80% of what THEY think the property might sell for in the future, the buyer will have to make up the difference in cash, in order for the seller to get the agreed upon price.  If the buyer is not willing to pay that difference in cash, then the house may not be able to sell for “what the market will bear”.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

24 thoughts on “Changes in Appraisal Standards can affect housing prices

  1. Yes, I read the article too.

    What I find profoundly troubling is valuations with no comments on appraisals regarding clear seller concessions such as paying for closing costs or the common practice of off-setting those costs paid by the seller by jacking up the sales price for 100% no down buyers (this practice happens on every 100% financed transaction our office closes).

    Obviously Appraisal firms have access to the NWMLS and can see if a seller is willing to pay closing costs or some other concession by a builder such as free upgrades or offers of vacations or cars which is now becoming common in select markets across the country. Appraisers also have access to listing history which shows how long a home is on the market or if it has had price reductions or has been re-listed two or three times.

    If a home is priced at the very top of their price range and a 100% financed buyer comes along to buy it, the question raised is: how does that home get appraised for $10K over ask price if comps suggest it should sell at the list price? How is the increase and seller contributed closing costs addressed on the appraisal? Are Appraisers privy to the terms of PSA’s? If not, should they be?

    If there is an Appraiser out there that could comment on this, I and presumably others would be grateful.

  2. Tim,

    When I sell a property at a very high price, as a seller’s agent, I often get calls from appraisers who are appraising nearby properties weeks or months after my sale closes. They will ask what special considerations caused the price of my listing to sell so high.

    During the boom years, as the quote says, these concessions were not a major concern. I do think you will see appraisers getting tougher and making more calls to listing agents to ascertain concessions, if lenders get more nervous as to future value.

  3. I find your comment “the house may not be able to sell for ‘what the market will bear'” to be interesting. The willingness of a bank to lend its money is perhaps the most important factor that determines “what the market will bear.” So I guess I’m confused that you seem to be seperating the two.

    If a lender was willing to loan me two million dollars, interest-free, for three hundred years, I’d be able to buy 90% of the properties out there. Oddly enough, no bank would do that. As a potential buyer, my market of available homes is determined primarily by the amount of money a lender is willing to loan me, not by my personal determination that house X is worth $Y.

  4. The Tim,

    When the seller receives multiple offers that push the price well over the asking price and well over the comps, “what the market will bear” equals the most a buyer is willing to pay. If one or more of the buyers has all, or a significant portion of the purchase price in cash, then what the market will bear is free of external influences such as the appraisal.

    Before you think that is not a “here and now” comment, within the last 48 hours this has happened on a property where I represented a buyer client. We were bid out to the tune of $125,000 over asking price on a house priced at less then a million dollars. The property was not underpriced based on the comps. So much for a slowing market…depends on the house.

    We are waiting to see what will happen come appraisal time, but it is our understanding that there is a significant cash downpayment involved. If the lender is only providing 50% of the cash needed to close, it is unlikely that they will refuse to fund 50% of the sale price, as it is still less than 80% of the supportable value.

    I think the buyer who did this was ill advised for many reasons, but all it takes to change an appraiser’s view of price, is three crazy buyers with enough cash to close.

  5. Appraisals were an issue during last year’s hot market here in the Phoenix area. It was fairly common to see the appraisal boilerplate clause in the AAR contract (allowing the buyer to cancel the contract if the appraisal didn’t come through) waived by the buyer, especially when the eventual sales price was well above even the most liberal of appraisals.

    This year, however, I’ve yet to have an appraisal issue (he said as he desperately searched for a mainstay to scratch). In fact, I’ve found it amazing just how many appraisals come in for the sales price or just slightly (under $1K above.)

  6. What the market will bear for lenders and buyers needs to be analyzed separately and in each particular MSA. Banks lend on many factors including what direction they believe the real estate market is heading. The principal amount of the loan and the note rate are also calculated based on the loan index, bank margin, inflation risk, borrower risk, etc.

    housing prices are influenced by the buyer’s ability to acquire financing, but most of the influence is price pressure from buyer demand in market of short supply. Some buyers will pay cash or acquire a smaller loan negating the impact of a low appraisal influencing bank financing.

    In North Platte, NE and the surrounding counties, it is very common for the appraisal to come back 10-15% less than the contract price. Buyers routinely pony up a down payment of 30%. It happens to be a common practice in a boom and bust market.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    TEAM REBA – RE/MAX Metro Realty, Inc

  7. Thank you for the excellent comment, Michael, particularly with regard to “borrower risk”.

    Too many people think an appraisal is the be all end all of “inherent value”, and don’t appreciate that a property can appraise differently depending on the “borrow risk” of the individual purchasing the property.

    Someone with 50% down, an 820 credit score and loan ratios of 20/25 may get an appraisal at full sale price. Another with zero down, stacked costs, a credit score of 620 and ratios of 34/43 may find that the property “does not appraise”. Same property and same price.

    Many don’t want to believe that…but it is true.

  8. I don’t agree that borrower risk influences an appraisal. If you got that out of my comment… mistake for not being clear.

    An appraisal for a specific property should come back with the same value for every prospective buyer. Real estate involves many more qualitative components than the pricing of capital market assets, but in an ideal world the appraisal should be the same.

    Borrower risk influences the banks calculation of the loan terms offered to the borrower such as down payment, note rate, loan term, pre paid interest, etc.

    I will agree with your comment in some markets involving less ethical professionals. Banks coerce appraisers to make the number so the borrower can acquire the property. It usually involves high capital growth markets and collusion between the lender, agent, and appraiser. San Diego and Portland have been in the news. When a borrower defaults on the loan the State and Federal authorities may conduct an audit involving the bank, broker, agent, and appraiser.

    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    TEAM REBA – RE/MAX Metro Realty, Inc

  9. If the buyer is not willing to pay that difference in cash, then the house may not be able to sell for “what the market will bear

  10. Not so fast,

    Vist the beaches of L.A. where Cash is King, and you will quickly see a market that rises and falls with what “the market will REALLY bear” without regard to false influences, like financing. It is no coincidence that housing prices rise and fall differently in areas where people are not entirely dependent on financing.

    And we DO have those segments in every marketplace, including Seattle.

    All the buyer needs is the small increment of difference in cash between sale price and appraised value…many will do that for the right property. “Must appraise” clauses are relatively recent clauses and can be stricken from the contract.

  11. Ardell –

    How is financing a “false influence”? Available financing directly influences what real estate will sell for. There’s nothing “false” about it. A property, by definition, will sell for *exactly* what the market determines it will sell for. If financing institutions aren’t willing to lend xx% of appraised value, then one of exactly four things happens:

    – the original buyer makes up the difference
    – another buyer comes along
    – the seller takes the place off the market
    – the seller lowers their price.

    Don’t confuse the market price with the appraised price. The latter is only an estimate of the former, and is by no means definitive.

    Also keep in mind that if it wasn’t for the easy, cheap money over the last five years (historically low interest rates, 100% financing options, interest-only loans & option ARMs), this real estate boom would have likely never happened. Further note that if the availability of cheap & easy financing goes away, the buyers will disappear, and the market will swiftly adjust prices downward.

  12. Not so fast,

    I will agree with you. Since the title of my own article is “Changes in Appraising Standards Can Affect Housing Prices”, I really should agree with you, since it was my original point. Not sure how I got sidetracked. Thanks for taking me back to square one.

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