Economics, U.S. Economy

Realty, Unreality: Are low appraisal values a problem in housing?

Separating facts from whoppers
Image Credit: Diana Parkhouse (Flickr) (CC BY 2.0)

Image Credit: Diana Parkhouse (Flickr) (CC BY 2.0)

Headlines such as Unrealistically Low Appraisal Values in Up Markets a Problem and Low Valuation in Home Appraisals Causing Steady Level of Contract Glitches are commonly used by the National Association Realtors (NAR).

Consider this statement: “Although 65 percent of Realtors® surveyed in September report no contract problems relating to home appraisals over the past three months,[1] 11 percent said a contract was cancelled because an appraised value came in below the price negotiated between the buyer and seller, 9 percent reported a contract was delayed, and 15 percent said a contract was renegotiated to a lower sales price as a result of a low valuation.”[2]

This gives the distinct impression that low appraisals are endemic since 35% of Realtors had at least one instance of a contract problem relating to a home appraisal. However, the fact that 35% experienced an instance of a low appraisal tells us nothing about the actual prevalence or rate of low appraisals being experienced in the marketplace. For that we would need to know the total number of appraisals covered by the survey and the number that came in low. Of course, information on the distribution of the lows and highs would also be helpful.

Poorly worded questions are at the root of this confusion. Consider if Realtors were asked: Over the past three months, have you experienced a contract that proceeded where the appraised value came in above the sales price? The result would certainly have been that nearly 100%, if not 100%, would have said yes, they had such an instance in the last three months.

No one should be surprised to find that some subset of buyer-seller negotiated sales prices differ from an appraiser’s determination of market value. After all, each property is unique and real estate an illiquid asset making price discovery more difficult.

To get the facts, Realty, Unreality turned to data published by FNC, Inc., which tracks a large dataset of recently completed purchase-mortgage appraisals. FNC looked at single-family home and condominium purchase-mortgage appraisals completed between January and June 2012 and found:[3]

1.    While appraised value can differ quite substantially from contract price, 29% of pre-closing sales transactions appraise at exactly the contract price.

2.    Fifty-nine percent appraise at above the contract price, with 23% appraising at more than 3% above the contract price.

3.    Twelve percent appraise at below contract price, with 3% appraising at less than 3% below the contract price.

4.    A majority of those appraising at below the sales price were low by more than 5%, while 0.7% were low by less than 1%.

FNC concluded that while “market-based appraisals have often been criticized for failing to support potential mortgage transactions—especially if the adjustments result in a lower appraised value than the contract price, our analysis reveals appraiser due diligence in the process of developing a market value opinion on the underlying collateral. Meanwhile, we find [88%] of appraisals provide a valuation that supports the contract price. As shown below, the evidence does not support the claim that low appraisal valuation has prevented contract closings.”

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The strong upward bias in the results above as compared to a normal bell shaped curve clearly demonstrates appraisers are cognizant of the sales price, take this into account in developing a concluded value, and try to avoid coming low if possible (0.7% come in low by less than 1%).

This is good news in terms of protecting the lender and consumer as the appraisal process is supposed to be a check, not a rubber stamp. Ask the buyers who benefitted from a lower purchase as a result of an appraisal coming in low. NAR’s survey is useful in that it found that Realtors indicated about 40% of low appraisals resulted in the transaction being renegotiated to a lower sales price.

On the NAR’s statement that low appraisal values a problem, Realty, Unreality gives the NAR a Whopper-O-Meter rating of:

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Notes:

[1] Data on appraisal issues are from a monthly survey for the Realtors® Confidence Index, posted at www.realtor.org. The findings from a panel of NAR members typically are based on more than 3,000 monthly responses.

[2] NAR, “Low Valuation in Home Appraisals Causing Steady Level of Contract Glitches”.

[3] Yanling Mayer, senior research economist, FNC, Inc. Housing Market Trends, FNC Study: How Local Market Conditions Affect Appraisal Valuations. Similar results were found for all periods studied, which went back to early-2010.

3 thoughts on “Realty, Unreality: Are low appraisal values a problem in housing?

  1. The lenders are fighting the last battle when appraisals reflected past sales even though values were declining.

    Example, I just refinanced my principal residence. There is/was an IDENTICAL house next door that had sold 11 months previously and the appraiser marked the value DOWN about 8% for the time adjustment; even though every report shows RE values increased everywhere 6% to 10% during that period.

    Not only that the underwriter wrote down $1.1 mm in federally-insured bank deposits by 35% because “those assets might decline in value”.

    I can’t believe it either.

  2. My home was put on the market on February 13, 2013. By February 15, 2013 we had two competing offers after showing the home 7 times. We accepted the better offer for the exact amount that we listed the home for. However, the appraisal came in at 18k less!!!! We are selling because we want to move to a newer home less than a 1/4 mile away that is larger not because we HAVE to – in other words we were unable to negotiate a new deal. Exactly one month later, we accepted a second offer (not as high as the first), but still decent. This time the appraisal (FHA), came in even lower!

    Our home has a remodeled (rooms were taken down to the studs) kitchen and dining room, updated living room, updated bathroom and new carpet in the master bedroom and living room/hallway, new HWT, new exterior doors, new AC (one year old), a 10 year old 20×20 garage, and new landscaping. We also have a deck and a bricked in patio area next to the deck for grilling. It backs up to forested area that we are allowed to garden on, and keep cut back. The school district is great and we are within walking distance from our local metropark on Lake Erie. In other words, it is a quality home in a quiet neighborhood but the appraisers are not taking any of the updates, curb appeal, the forest view, etc into consideration.

    The issue seems to be that there are no nearby comparables sold within the past 6 months so the appraisers are comparing our home to run-down shacks that are more than 5 miles away and do not even begin to compare to our home other than the basic number of rooms, square footage, and lot size.

    Are low appraisal values a problem in housing? YES!

  3. In Response to AK;

    It seems as though you expect the appraiser to rubber stamp your contract price. The appraisers job is not to help you, but rather to protect the lender. You stated that there are no sales to support the contract price and that the appraiser went 5 miles searching. If there were better comps, I presume you would have stated that. They can’t invent data, either there are homes to support your sale or there are not. Facts sometimes are uncooperative.

    If you had to loan your own hard earned money. Would you make that loan knowing that if the buyer defaults, there are no other sales in the area to support what you loaned on this property?

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