Home sales are being hampered by low appraisals, but whether they are accurate or not are another matter.
More than 10% of Realtors in the U.S. have said they've had sales called off because the appraisal was lower than the buyer’s agreed prices, claims a National Association of Realtors survey in January. Furthermore, another 15% said that low appraisals caused contracts to be renegotiated, with either buyers putting up more money or sellers dropping prices.
Another survey last August by the National Association of Home Builders showed that one third of home builders had also suffered with lost sales due to low appraisals.
Appraisals are usually required before lenders will approve mortgages so they can be sure the value of the home is greater than the loan.
During the housing boom, low appraisals were rarely a problem, as prices were rising steadily. But the slump had showed that inflated appraisals contributed greatly to the housing bubble. Nowadays, both lending and appraisal standards are much tighter.
The fall in house prices is what is driving low appraisals, rather than flawed valuations, according to both appraisers and lenders. Property prices in the U.S. are down 30% from their 2006 high, and they are expected to fall further still.
American Bankers Association vice president Robert Davis said that the appraisal of homes becomes more and more difficult in a rapidly changing market.
A big factor in all of this is foreclosures, which accounted for around 25% of sales in 2010. These homes fetched a price of 28% less than non-foreclosed home sales. These figures are often taken into account when it comes to the appraisal of non-distressed properties, skewing valuations.
Beazer Homes stated recently that “foreclosure comparables continue to negatively impact appraisals”, which has led to an increase in the number of sale cancellations in many markets. The problem is compounded by new rules introduced in 2009, which lessens the ability of lenders to influence home appraisers. In turn, this has forced many lenders to outsource appraisals to different firms.
These outside appraisers are often not as familiar with the areas of the homes they are valuing. People from one end of the state are out and about doing valuations at the other end, where they have less idea about the local market conditions, and this is may be a big cause of low appraisals.
In one example, Steve Keefe of the Coldwell Banker Sky Ridge Realty firm in Lake Arrowhead, Calif., said that he had six cancelled sales this year due to low valuations from appraisers who were out of town.