Appraisers getting tough

"Buyers are the ones that determine value, that is how real estate works," Treon said.

And they still do... if they are paying cash. If you want to borrow the bank's money to pay for the house then the bank gets a seat at the table.

I tend to agree with Rona's assessment of the market. Good houses are still holding their prices, but most aren't selling. Crappy houses are more prevalent and with significant price drops, so they may be moving more but there's a whole bunch of folks who continue to sit on the sideline since they'd rather rent than buy junk (in the past, people would buy junk out of fear of being forever priced out of real estate).

As for the appraisals, I had friends recently buy a house. The appraisal to 10 days longer than anyone expected, but it did come in at just about the selling price (surprise surprise).

Personally, I believe many of the buyers who feel snubbed by “tough appraisals” and “stingy lenders” will look back in a couple years and reflect on how fortunate they were not to have purchased a home that has since plummeted in value.

Boston will see further declines of at least 30% as prices return to levels supported by fundamentals. Buyers who purchase now with 20% down will likely be underwater in 2-3 years. Banks and appraisers know this, and are therefore being justifiably conservative in their value estimates.

I applaud tough appraisers for doing their part to rescue banks and naïve buyers from financial ruin. Keep up the good work.

It's apparent that the fate of foreclosed properties did not generate
sufficient fear in borrowers minds. Governmt. intervention has created
the concept of "soft" pricing. Buy now, negotiate with your lender later.
When this becomes a serious "cash market" prices will plummet
precipitously. One only has to check MLS to see Hundreds of homes,
available in any Boston suburb , in the 1mm + class to determine that
what's missing in the current market is CASH.

Look at the data, not personal experience. In my neighborhood (safe, good schools, good income, short commutes), the price per square foot of SOLD houses has dropped substantially in the past 6 months, but asking prices are still going up. There's a large disconnect between asking and sold prices. Add to that mix still quite a few uninformed buyers who aren't aware of what other similar houses are actually selling for now, only what houses used to cost 3 years ago when they first started looking, so they get anxious when they see something they can live with and overbid when they see a few other people at a showing. When their eyes are bigger than their pocketbooks, they have to borrow someone else's money to pay for the house, but that money dealer will hire an appraiser who is a bit more rational and looks around at the actual data to establish whether it is a sound purchase. It is then that reality finally sets in for everyone. If those buyers had done their homework to establish a reasonable offer based on recent comps, instead of anchoring their perception on out-dated (bubble peak) markets, the appraisals would more closely match.

Lance - "buyers who purchase now with 20% down will likely be underwater in 2-3 years." This is a ridiculous comment.
drops of 30%? This is a stretch at best. 30% of a home's value is a HUGE drop.

I recently bought a home in MetroWest. I thought the seller should have come down a bit more, considering the market, but i was willing to meet her price because of the prime location. I'd been watching the market for years; I knew the same house could have gotten 40k more in 2007. Anyway, the appraiser couldn't find any comps (nothing similar had sold in more than 9 months --because nothing much was moving). Appraisal was pegged as declining market... went to second review... lender said they'd only pass the deal with 10% down. So I gathered my pennies, called in some favors, and gave the 10%. I don't blame the appraiser or the lender for being too 'stingy', it's just an odd market right now.

Brendinno - judging from many prices I've seen, Lance is right (not that that is a surprise). If people pay current prices, a 30% drop in many "nice" areas, which are still pretty flat from the peak of the bubble, is easily achievable.

We bought a place recently for $475. The comps done by the appraiser came back as $515, $520, $525, $480. The $480 comp was a 2 bed/2 bath in a totally different neighborhood (and the sale was over a year ago), whereas our place was 4bed/2bath with 20% more living area. The other 3 were at least more recent sales within the past 6 months, and closer in terms of bedrooms and living area. The appraiser "looked" at the numbers and said the house value is $485.

I think the bank told him that he'd better not come up with a number too far above our purchase price.

HVCC. Home Valuation Code of Conduct, aka political grandstanding that has caused more problems than it has solved.

1) NAMB conservatively estimates (breakdown below) that the HVCC is costing consumers over 2.8 BILLION dollars a year in extra fees, created by long delays (extended lock-in fees) and higher appraisal costs.

2) Unregulated Appraisal Management Companies (AMCs), who have been the subject of several misconduct investigations, are the centerpiece of the HVCC. The original Cuomo investigation involved a federally chartered bank and an AMC.

3) AMCs are driving honest appraisers and mortgage brokers from business, eliminating competition, increasing costs to consumers and reducing state revenue. The HVCC is causing significant delays in real estate transactions, hurting real estate agents, title companies and other third parties reliant on turnaround time.

4) HVCC does nothing to reduce fraud, as it legitimizes the same failed model, which was the subject of Attorney General Cuomo's investigation.

5) No Portability! Consumers are "trapped" with a specific lender. If a better deal becomes available with a different lender, the consumer is forced to pay for another appraisal.

Background:

I. Lack of Portability
A. Lenders are not allowing borrowers to transfer appraisals, regardless of the reason.
B. Forces the borrower to pay for another appraisal and wait for a new appraiser to be assigned and complete it, increasing the total cost and time needed for obtaining a home. Delays in turnaround times also cause the borrower to miss rate lock deadlines and possibly face penalties charged by the lender.
C. In a poll conducted by NAMB, 75.8% of respondents said that 0% of their appraisals are portable since the enactment of the HVCC.

II. Lack of Quality
A. AMCs are assigning appraisers from a different municipality, county, or even state to appraise the target house, therefore unfamiliar with the neighborhood and unable to produce an accurate appraisal.
i. Because of this, the HVCC is forcing appraisers to be in direct violation of the Uniform Standards of Professional Appraisal Practice (USPAP) for jurisdictional competence.
B. Because AMCs pay appraisers such low fees, those assigned appraisers willing to do the work are often inexperienced and fail to adequately appraise the home.

III. Increased Cost of Appraisals
A. The minimum increase we have seen in direct consumer cost is $150 per appraisal. That, coupled with the drastically increased appraisal turnaround times that impose extended lock periods at an average expense of $561.95 per loan, is now costing consumers an estimated additional $711.95 per transaction.
B. $150.00 - minimum increase per appraisal
$561.95 - average loan amount of $224,778 at .25% for extended lock period
$711.95 - average total increase per transaction
x 3,870,552* - 2007 HMDA report of residential real estate loans originated
$2,755,639,496 - $2.8BILLION in increased fees to consumers!

IV. Articles Illustrating the Effects of the HVCC

A. The Appraisal Bubble - The Center for Public Integrity
http://www.publicintegrity.org/investigations/luap/articles/entry/1264

B. The Cure is Worse than the Disease - Appraisal Press
http://www.appraisalpress.com/news/articles/hvcc_the_cure_is_worse_than_the_disease

C. Appraisals Roil Real Estate Deals - The Wall Street Journal
http://online.wsj.com/article/SB124450388959795613.html?mod=djkeyword

it is the fannie mae standards (revised in 2009) that are at the root cause of a lot of the discrepancies we are seeing..

1. fannie mae more or less mandates comparable properties having sold no less than 90 days prior to the date of appraisal (used to be 6 months).....note: an appraisal completed in april relied on sales occurred in the winter and prior to the homebuyers tax credit

2. Two additional actively listed properties must also be included...this is not nearly as problematic since there are no shortage of listed properties...the problem manifests itself when you have a neighborhood full of happy homeowners who do not care to sell or would not list their home in this current
economic climate

....the good news is that the sales that do occur this spring will help out future appraisers in the coming 3 months...also, this difference between prior sales and properties being placed under ageement (in terms of price) means that consumer confidence is higher than it was last winter or fall...

#6 - Do not try to argue with Lance, charles, etc. - they already know exactly what will happen and you shall not sway them from their doom and gloom.

Timing the market is basically gambling, and I believe that the decision on whether to buy or rent depends on so many individual considerations that giving people buy/rent advice is pointless.

We bought our house when we decided we'll be in the area for a long time, did not want to deal with the hassles of renting AND the interest part of our fixed rate 15 year mortgage payment plus taxes plus 3% of house value (set aside for maintenance, etc.) were less than our rent. Oh, and we bought only enough house so we can pay the mortgage on only one income (we both work and make similar salaries).

We'd probably get less today on our house than we paid when we bought it, but if you compare it with paying the rent we'd have paid and the annoyances of living in a rental, we'd gladly do the same thing again and come out ahead both financially and in terms of quality of life.

Buy a home when you need one and can afford one, and you'll be fine. Buy a home in the hope it will keep appreciating, and you know what happens then :)

HBX - If that is true than your town has come right back into traditional affordibility guidelines. Principle is usually included in that calculation (I believe due to opportunity cost) but in the first few years you pay so little principle that it hardly matters. In fact the basis of the price to rent multiplier that the bears post here all the time. I believe Lance has used that very formula to justify his calls for additional % drops.

I know that where I'm looking price to rent ratios are nothing like that.

EH is right on (see #10). Appraiser's aren't getting tough, though; They are getting sloppy. The AMC's are pushing TIME, not quality. They want these turned around in 48-72 hours. There is simply no way for a credible appraiser, with a full workload and the limited comparables, to do a quality job in that amount of time. SO, the appraiser takes the job and brings the value in incredibly low so as to CYA and not hear flack from the AMC. Appraiser has no accountability to the client or borrower since he has no relationship with them. This type of appraiser is what rules the market after the HVCC. High prices and low quality at the worst time.

30% off from here is a no-brainer, look at CA, FL, NV, VA, GA, ,NC, SC all at least 30% off peak, the number of states joining the 30% off peak club is growing rather quickly...

Distressed properties are going to make up the lion's share of your 20-30% price decline. I believe the April numbers showed 45% of sales were distressed homes. So if 50% of sales in the remaining downturn are from distressed properties and they average 30% off current valuations, the nondistressed properties can theoretically survive with a negligible 10% price drop, and you still hit the 20% overall price drop.

News Flash... Young buyers are in serious student loan debt and have next to nothing to put down on a 1st home. So your affordability numbers need to come down becuase there is nothing to put as a downpayment. This will be remembered as a Lost Decade for Housing.

The Appraiser was everyone's friend when the Mortgage Broker told you he knew an appraiser that could get your value. Party's over folks.

#19: Well said...

One must remember the appraiser's job it to take a snap shot of the market and estimate the value at that point in time.

There is no distinction between whether or not a buyer or borrower has any intention of selling a home at that particular point in time.

Look at your stock portfolio, a stock or bond is worth what someone will pay you for it on any given day. Just because I don't want to sell my stock today doesn't mean it is worth more or less because I choose not to sell it - your residence is like any other economic asset, in fact it's less liquid than a stock, bond, CD or cash.

I would like to add to #19 - this is also the Lost Decade for Employment (no net growth, not seen since the Great Depression), and the Lost Decade for personal accountability (mortgage brokers, bankers, credit card companies, Wall Street, Government, homeowner's using their houses as ATM's, higher education letting the consumer get up to their ears in debt, consumers, etc., etc.)

We've already had our lost decade.........Time to move forward folks.

Excuse me... a "failed" appraisal? No such thing. An appraisal doesn't "pass" or "fail". If done competently, an appraisal is a estimate of the value. Either the buyer is paying too much, too little or on the mark if they have done their research. If buyers aren't doing, research, they don't belong in the market. Naive and uninformed consumers were highlighted as being taken advantage of by mortgage brokers and banks. Now, they need to educate themselves so it doesn't happen again.

Tricia,
You are right, the appraisal does not pass or fail. However the loan passes or fails based on appraisal. It is a real estate shorthand to say "pass or fail" in regard to the appraisal when we really mean the loan. I have committed jargon! I apologize.