Friday, July 3, 2009
Market Upturn + Appraisal Process = Catch-22
So we've all grown up believing that in a free and open marketplace, an item or product is "worth" what someone is willing to pay for it.
Not so, it seems, when it comes to residential real estate when a declining market takes an upturn. In the Ann Arbor real estate market, we experienced a distinct market upturn in May, with the average sales price rising by almost 9%, the first time the average sales price has risen in more than a couple of years. The June market statistics will not be published for another week or so, but all indicators point to another positive month. Now, two months do not a trend make, but signs are strong that the residential real estate market (at least in Ann Arbor) has hit bottom, and is on the rebound up.
The local market has been really popping over the past 8 - 10 weeks. Personally, I have been involved in several multi-offer situations, with a few offers the first day homes hit the market at over asking price. Several other agents in my office report similar activity, and several other cooperating agents from other offices are scratching their collective heads at the pleasant spike in showings, offers, and multiple-offers. Given this great upsurge, you would think everyone would be happy.
Not so fast. Once a sales price is agreed upon, the purchasers Mortgage Company sends out an Appraiser to assess the value of the home. In the past, this was typically a 'rubber-stamp' approval of the agreed upon purchase price, especially with the Mortgage Broker sending an Appraiser of his or her own choosing.
The recent market melt-down has turned this process into a quagmire of red-tape, unbelievably ridiculous requirements and regulations, and irrelevant standards being imposed which all result in a homes "worth" being decided by a third party. I do not know of any other transaction where a third party can effectively kill a deal between a willing seller and a willing buyer. This would be like agreeing to purchase a car, and the Finance company telling the buyer and seller that the car is not worth what they have agreed to.
At a recent office meeting, several of my associates have said that they have had appraisals come in at $10,000, $20,000, $40,000, and even $100,000 below the agreed upon sales price!
It works this way: When an Appraiser is called in, they must base their appraisal on recent comparable sales (Comps). Some underwriters have tightened the parameters so tightly, that it gives an unrealistic picture of the market, and actually serves to perpetuate a declining market. The Appraiser must only use sales within the past 90 - 120 days, within a tight geographic area. In the past, they were not allowed to use foreclosures and Short Sales as Comps, but do now. Using these sales as comparables dramatically decreases the "worth" of the subject property.
In addition, Appraisers now must be chosen by lenders on a 'blind draw' which means that quite often, the Appraiser is from out of the area, and is not attuned to the local market.
Bottom line: The Appraisers say they can't appraise at a higher price until the comparables are higher, yet there is no way the comparables get higher until Appraisers appraise higher. Hence the Catch-22. We are told to wait until the market "Sorts itself out." In the meantime, willing sellers can't sell, and willing buyers can't buy because of the unrealistic regulations imposed by the Mortgage Industry. The very same Mortgage Industry that got us in this mess in the first place!