August 05, 2009

Why Are Appraisals Coming in Low?

For the past few days we have been talking about when the market will bottom out. Today NAR announced that for the fifth straight month home sales across the country have increased. This is good news that more buyers are jumping back into the marketplace. So with all this good news why are home prices still falling in most areas? The fact remains that inventory of homes remains higher than the number of buyers. True, it is adjusting to a more balanced market but with unemployment high, economic conditions on shaky ground, and homes in some phase of foreclosures equaling over 45% of the market….homes are experiencing a downward trend.

If the market wasn’t already hard enough for sellers, we have a new gift from Freddie and Fannie that impacts how appraisers value homes. Although the purposes of this act are something we should strive to achieve, there are always unintended consequences that come from any new government program.

For example, we are working with our buyers to purchase a home in West Point. It is a very nice home and our buyers are anxious to move in at the end of the month. There were multiple offers on the home and the first buyers to have this home under contract had an FHA appraisal done on the home but were not able to complete the sale. Once an FHA loan is done, that value remains with the home for a six month period of time. This is where we entered with our offer. As we have done our due diligence we find the earlier FHA appraisal shows that our offer too is above this value. Both the seller and the buyer are now trying to figure out just what to do!

What makes the difference in offers and appraisals? The comps we used showed our offer to be within the range an appraiser could use. The appraisal done by the FHA appraiser was likely conservative given the new HVCC regulations and wanting to make sure that estimates of value were easily justifiable. There is not blame meant for any appraiser but simply to explain how the new Code of Conduct is having an impact on the appraisal values of homes and impacting sales even though buyers and sellers are agreeing to pay the price. The problem comes in that buyers cannot get a loan for more than the appraised amount which can cause many transactions to fall apart.

Here is more information on the HVCC Program directly from Freddie Mac. If you need help in understanding how to sell or buy a home in this market, please send me an e-mail.

Posted By: Steve Randall