It's Time to Trust the Housing Market Again

A major, and continuing, part of the financial crisis relates to the struggling housing market. According to the National Association of Realtors, housing inventories are up slightly, possibly driven by those seeking to “trade up” in the “down market.”  This could help signal (and fuel) a turn around in the housing market.  However, credit remains difficult to obtain, and just as important (and unfortunate), home buyers (and sellers) are facing a difficult appraisal market, too.  An interesting aside:  All-cash sales are a remarkable 27% of all sales (10% is the more typical number), another indicator that banks aren’t fueling a recovery in the market.  All-cash sales, of course, skip the need for mortgage approval (and appraisal).
 
The Home Valuation Code of Conduct, or HVCC, which went into effect last year, puts restrictions on appraisals for any loan with funds related to Fannie Mae and Freddie Mac. The rules place significant restrictions on the process used for appraisers, and while designed to help solidify the industry, there are indications that it adding additional restrictions to the process that are further limiting a housing market rebound. 
 
The biggest concern with home sales used to be that the buyer would not get financing approval or that the inspection would be a problem.  Now appraisals are become a major concern, with appraisals coming back as much as 30% below the negotiated sale price.  It’s hard to argue that the appraisal system was not out of control during the housing boom in the early part of the decade, when the negotiated price seemed to dictate the appraisal.  (Of course, market price is not necessarily a bad standard for valuation, but there is no reason for a third-party appraiser if the negotiated price is going to be the appraised value, anyway.)  In this market, though, allowing market negotiations to determine prices should be more, not less, accurate than during a boom cycle.  There is a surplus of homes on the market and buyers are not (usually) competing in bidding wars that will cloud their judgment.  Thus, buyers have time to see what is available, analyze the market, and determine a wise price.  Realtors, similarly, are able to consider the market and work with their clients (on both sides of the negotiation) to assess the value of a home in a way that moves the property.   
 
Obviously, sellers and realtors on both sides of the transaction are interested in getting the most money they out of the transaction that they can.  This doesn't necessarily mean they are wrong in their price estimations (or at least not wildly wrong), especially once a buyer agrees to a price.  After all, if there is no transaction, there is zero benefit for the realtors or the seller. 

When, as now, a market is hard to assess, perhaps a mechanism for expressly considering the negotiated price as part of the appraisal process is needed. Otherwise, gun-shy appraisers may be compelled to “over learn” their lesson, thus exacerbating a problem they helped create.

--Josh Fershee