NAR Keeps Whining About Appraisals 18 comments
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I’ve written numerous posts about the contretemps over the new appraisal standards, commonly referred to as HVCC. The realtor industry keeps whining about the appraisal management companies bringing in appraisals that are lower than the sales price and this is scotching their deals.
My position has been that it’s about high time appraisers brought in values that reflected reality as opposed to whatever the realtor or loan officer needed to get the job done.
I thought Barry Ritholtz at The Big Picture did a good job today putting their complaints into perspective.
Remember back during the housing boom, when all of the corrupt real estate appraisers were busy pumping up local comparables, and helping to drive prices higher?
Of course!
Do you recall how the National Association of Realtors swung into action, and being in the vanguard of responsible behavior: 1) Were the first to spot these problems; 2) Demanded their membership identify these corrupt appraisers and mortgage brokers; 3) Proposed fixes for this widespread corruption and presented them to Congress
Me neither.
My thoughts came back to that this week, when I was catching up with some missed research and economic reports. I was traveling to and from Vancouver, so I missed the June Existing Home Sales data. In finally reading June’s EHS, I couldn’t help but notice this doozy in the 4th paragraph of the National Association of Realtors release:
“A June survey of NAR members shows 37 percent experienced at least one lost sale as a result of the new Home Valuation Code of Conduct, with seven out of 10 reporting an increased use of out-of-area appraisers. Seventy percent of NAR appraiser members said consumers were paying higher fees, while 85 percent report a perceived reduction in appraisal quality.”
What contemptible bilge.
Where TF were these concerned citizens at the NAR when appraisers were engaging in all sorts of funny business, driving prices skyward? They were AWOL. You do not recall any commentary during the boom about the artificial number of sales, or the increased prices that appraisers were causing, because somehow, the greatest bout of Appraisal fraud, predatory lending, and irresponsible mortgage underwriting standards the world has ever known managed to escape these ethicsless weasels’ notice.
I think we know where Barry stands!
Anyway, I wasn’t going to pursue this and then I ran into this on Diana Olick’s blog. It’s from those kindly folks at NAR.
The National Association of Home Builders’ Bernard Markstein told me this morning, that “in a lot of places the appraisers have not been adjusting for the fact that it’s [the comp] a foreclosed home or a short sale, and we’ve even had cases where appraisals have come in 10 or 20 percent below the construction costs of a new home.”
So what? There is nothing that says that a house has to appraise for what it cost to build it. If buyers are only willing to pay $50 a square foot for housing and you spent $75 building a new home, guess what it’s worth. That’s why we do appraisals, to figure out the market value of a property. The last time I checked most underwriters weren’t willing to accept a list of the construction costs as validation of the value of a property.
I think Mr. Markstein needs to get out more often. One of the reasons that there aren’t more new homes being built and sold in many areas is because they can’t compete with foreclosures. There are plenty of homes on the market for less than what it would cost to replace them and that’s why there is high demand for them. It’s that nasty old supply and demand phenomenon.
I’ve acknowledged that there are problems with the new appraisal system but they are operational and curable. That being said, it’s high time the NAR and its friends stopped trying to bring back the good old days. We know what their definition of a good mortgage amounts to and what effects it has and don’t really need to revisit that.
More here (my last post on this subject with a link to all previous posts about it).
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On NAR - they have a code of ethics they've published for their members. Maybe it's time they create a code of ethics for the organization so they stop being so selfish.
BUT, the NAR has a point in this case. What the author and commentors are missing is that the pendulum has now swung too far in the other direction.
While appraisers might have been pressured in the past, now they act with relative impunity. Which means the system doesn't have any checks in place. Without the checks, accuracy becomes a problem.
Appraisers make mistakes. The system is now set up to where they can't be challenged. Many appriasals are coming back errant, and in most cases, that means low. This is due to the amount of pressure they feel given what has occurred over the past few years. Accuracy is the objective, not artificially low valuations.
Because many appraisals come in low, the buyer/refinancer can't get their home/new loan as they would be able to if the appraisals came back correct. This serves to add to the problem of getting people into vacant homes and getting loans refinanced so more people can avoid the resets coming.
While some may applaud this, I don't know why. It only serves to help further drive pricing down which only helps those that are renting or sitting on cash hoping for the buy of a lifetime. Perhaps that is what we have here. Or perhaps we simply have people who haven't thought out this issue thoroughly.
> jack
Well just remember... "What goes around comes around."
As a Realtor and a lender during the run-up to implosion, I can attest to the fact that everyone, and I do mean Everyone, during those days (except perhaps, VA), pressured appraisers to deliver maximum values - with no concern beyond the immediate deal.
"How did lenders, buyers, sellers and Realtors enforce their collective will on the hapless appraiser?" you might ask.
Easy. The power of the purse.
You see, it was generally understood by all parties, that if a particular appraiser consistently (1 or 2 times) failed to deliver the goods (value) as ordered, he or she would simply be crossed off the list. A more accommodating appraiser would be found. And, because there were so many new appraisers coming into the field, finding one who would make the appraisals work, was not a problem.
Today, as in the early 1980's, many appraisers are being brought to task for their failure to resist the pressures of the time. They, along with the so-called greedy mortgage lenders, are being publicly spanked and labeled as primary culprits of the collapse.
Very few folks are willing to put the blame squarely where it belongs... at the feet of the large institutions (including Freddie, Fannie and the BIG banks) who actually designed and pushed all the crazy loan programs, in the first place. It was the mass proliferation of goofy loan programs that spurred market participants - lenders, Realtors, Brokers, appraisers, buyers and sellers - to cross the lines of common sense and lose sight of the possible consequences of their actions.
So now, the marketplace is suffering through the extreme paranoia of those appraisers who remain in the profession.
But take heart. If history is any guide, you can be assured that, after enough financial blood has been let... this too, shall pass.
NAR does not have any credibility - they simply are unabashed about hyping the market. Did you ever meet a realtor who did not say - "It is very good time to buy".
What a disgraceful bunch.
Not once here have I read of a complaint about high "errant" appraisals.
Ever.
On Jul 28 10:27 AM User 82064 wrote:
> I am a real estate broker and have a finance degree. I've built
> homes and lead a 1000 acre land development project prior to the
> downturn. While most brokers follow the NAR religiously, I'm not
> one of them.
> BUT, the NAR has a point in this case. What the author and commentors
> are missing is that the pendulum has now swung too far in the other
> direction.
> While appraisers might have been pressured in the past, now they
> act with relative impunity. Which means the system doesn't have
> any checks in place. Without the checks, accuracy becomes a problem.
>
> Appraisers make mistakes. The system is now set up to where they
> can't be challenged. Many appriasals are coming back errant, and
> in most cases, that means low. This is due to the amount of pressure
> they feel given what has occurred over the past few years. Accuracy
> is the objective, not artificially low valuations.
> Because many appraisals come in low, the buyer/refinancer can't get
> their home/new loan as they would be able to if the appraisals came
> back correct. This serves to add to the problem of getting people
> into vacant homes and getting loans refinanced so more people can
> avoid the resets coming.
> While some may applaud this, I don't know why. It only serves to
> help further drive pricing down which only helps those that are renting
> or sitting on cash hoping for the buy of a lifetime. Perhaps that
> is what we have here. Or perhaps we simply have people who haven't
> thought out this issue thoroughly.
They're squealing about appraisers turning in realistic real estate value appraisals now, but that's only part of what is spoiling their party. They want appraisers to return to the practice of restricting their "comp" evaluations to the absolute minimum of the most recent sales, because that way, each successful manipulation and escalation of a property price will result, all the more swiftly, in the next overpricing, which, in turn, leads to the next even more severe overpricing, etc. That is a major way in which they were able to engineer the mid-decade pricing bubble.
Make no mistake--they desperately want to continue the fraudulent manipulation of real estate pricing, and the move toward honest appraisals is interfering with this effort.
Most economists will agree that stability in the housing market is key to stabilizing the economy. When you have homes that are well kept, with nice features, being valued the same as homes that are foreclosed, unkept, damaged and smell like animal urine, then something is wrong.
Seriously wrong. This hurts the person who kept their home up well, and it hurts the buyer willing to buy the nice home. So, while many have this overall feeling that agents caused this, you need to get your nose a little closer to the details to understand what is going on and how it really effects things.
On Jul 29 01:19 AM Cold Reality wrote:
> You real estate agents keep referring to an appraisal as "errant"
> when it does not reflect your hoped-for inflated price. Why are these
> appraisals "errant" when the other appraisals--the ones that ratify
> the pumped-up real-estate agent inflated price, aren't?
>
> Not once here have I read of a complaint about high "errant" appraisals.
>
>
> Ever.
We are all aware of the problem the appraisals caused on the upside, but at this point, it has no relevance to what is going on today.
And it hardly affects the agent because they will simply sell the property at a lower price which will effect their commission marginally. Where it really does the damage is that the seller can't get the true value of the property, and the buyer can't get the home they should have been able to afford. The net result is an errant devaluation of the neighborhood because an appraisal was inaccurate.
You can come on these boards and espoused your opinions all day long. But reality is the pendulum has swung too far and it needs to come back to the middle so the market can stabilize.
We already have a good system: the Veterans Administration fee appraiser system. It has worked for decades and no one's complaining about its AMC-style appraiser assignment process.
We already have a panel convened to handle Agency (Fannie/Freddie) loans: The Appraisal Subcommittee at www.asc.gov. From the website: "The ASC's mission is to ensure that real estate appraisers, who perform appraisals in real estate transactions that could expose the United States government to financial loss, are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics."
Since the United States government already owns Fannie/Freddie, why oh why oh why doesn't it simply utilize this panel to assign appraisals to its pre-screened appraisers?
As a real estate industry observer opined: The powers that be are all stuck on stupid [in a prolonged state of being completely clueless or too high to think straight.]
Also, the appraiser should not have to brear the brunt--through reduced compensation--of a market that is restructuring. The consumer ought to be willing to pay a couple of hundred dollars more for a fair and unbiased appraisal.
I LOVE the HVCC form. When it is understood by the appraiser, of which some are either deliberately ignoring/rebelling against or ignorate of the proper applications, the appraisal is amazingly accurate and built on a good foundation---namely the subject's market. When I review appraisals (and I do many reviews) it is glaringly obvious by looking at the MC form if the appraiser knew what their market was and what was happening in the market. In creating an appraisal, defining your market is the hardest step. It is also the foundation of the appraisal. After you identify your market and say what has happened in it for the prior year, the rest of the appraisal is a piece of cake...a fifth grader could do it.
Saying you disagree with an appraisal or that the appraisal is bad simply because of the value is not the appraisers fault nor does it mean the appraisal is inaccurate. Provide 3 better comparables in the market that support a different value (and I mention here that no one has requested a check for a lower value). If the appraisal was done properly in the first place, these sales were not used for a very good and definable reason and the appraiser will tell you the reason.
Remember: The appraiser has no interest in the property except to provide an accurate opinion of value based on the current market.
And as a side note, I have many "value reconsiderations" presented based on what is perceived to be "better comparables" by the owner or realtor. I can tell you, I have never changed a value based on these comparables because they have never provided "better" comparables all for differing reasons but some of which are: they are older sales(mostly over 6 months), superior in something major (ie waterfrontage, more than 1,000sf bigger etc), very far outside the subject's market, even had some that never closed as a sale.
Our job is not to hit the highest number or any number but to read the market and give an opinion of value for the subject based on that market.
Within a year, the price was $29,000 (a 7% increase). What changed??? Nothing changed, other than hype. A year later, the price on the billboard was $30,500. Then it jumped to $32,500 the following year. By the time I was in 5th grade, they were selling the last of the houses in the track for $35,500 and later $36,000! At this point, even I knew something smelled funny.
This amounted to a $25% increase in the cost of houses they had built five years before! My father and his friends weren't making 25% more money from their jobs. My allowance hadn't gone up 25%. True, there were a lot more businesses and people that moved into the Valley in those four years, and there was the feeling that available land would run out, so people began to panic, and were willing to pay more. Also the 73 oil embargo happened, and inflation on the financial system began to become a real problem. But still, Real Estate continued to increase much faster, and farther in the Silicon Valley, than anything else.
My family bought a 3800 sq ft home in the San Jose hills in 1973, for the current market rate of $53,000. This was not a foreclosure, nor did my parent's get anything better than an average deal. We sold that same house in 1980 - with a new paint job and new asphalt driveway - for $254,000! For the financially challenged, that's nearly a 500% increase in value!!! In that same time, my father's salary at Lockheed had not increased 500%. My allowance had not increased 500%. The number of people and businesses in the Silicon Valley had not increased 500%.
In 1980, we bought a 2,000 sq ft house further up the hill for $187,000. In 1987, my father retired from Lockheed, and sold the house for $367,000! The price of the house had doubled in five years. But in that same time, my father's salary had not doubled, nor had his friends' salaries. The population in the Valley had not doubled. There was not twice the amount of business in the Valley. So why had Real Estate gone up so much?
Hype was the conclusion we came to, and my father decided to take his winnings, and move my Mom and younger brother up to Eugene, Oregon where they bought a beautiful 3,600 sq ft house, on a 3/4 acre lot, right on the Willamette river, for $187,000.
In January 07', the house we sold in 1980, was valued at 1.2 million. That is an increase in value of 2,300% in 34 years. From 1973, to 1987 - when my father retired - his pay increased 500%, both because of cost of living increases, as well as promotion. His same job now (the position he retired at) pays about $150,000/year (his initial job - the one he held in 1973 - pays about $75,000).
So in 1973, the value of that house was 2.91 times his 1973 salary. In 1980, it was worth 4.88 times his salary. In 1987, it was worth 5.85 times his salary. And had he been working in 2007, the upward trend would have continued. This despite the fact that Lockheed tied cost of living increases for it's employees to inflation, when many other companies could not afford to. And this despite the fact that the neighborhood that house is in, has become far less desirable in the past thirty years.
Today - 7-29-09 - Zillow values that house at $707,500. It was valued as low as $620,000, back in January 2009. That is still 13 times more than we paid for it in 1973. In 1974, the minimum wage was $2.00/hour. Now it is $7.25/hour (less than four times as much).
My point is, the cost of housing - even adjusted after the crash of the past two years - has still risen far in excess of net incomes in that same period. Many claim the reason is because of "inflation," or the fact that, "They aren't making any more land." But those reasons alone cannot explain the meteroic rise in the cost of housing over the past 40 years.
My father was a fighter pilot before, and in the reserves, during his time at Lockheed. His words, "If you ever fly over this great country, and look down, you will see that it is mostly rural, even today." The next time you are up in a plane, I challenge you to look down. I venture to say that wherever you are flying, most of what you see will be rural. So where is the shortage of land for more houses? The answer: "There is no shortage, and will be no shortage - at least not in our lifetimes."
Housing values for the past 40 years, have all amounted to hype. I realized this as a child, walking to school through the new development. The new houses held only a candle to the houses in my, older neighborhood. They were on tiny lots, and all looked the same. They didn't have much more in the way of new amenities, yet they cost more. It was all hype.
I have never met a real Estate agent that has told me it was a bad time to by a house. The NAR was running ads the Summer of 2007, saying there had never been a better time to buy a house. Had you believed their hype, you would have lost 20 - 60% of the value of your home by now.
The day we stop treating houses as a commodity, and start treating them as a place to live, is the day prices will come into line with reality. Frankly, until then, it is cheaper to rent.