AI Response to NAHB on Appraisals Killing Home Sales

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Flawed Appraisals Killing Home Sales

The Appraisal Foundation Responds to NAHB December 8 Press Release on ‘Flawed Appraisals Killing Home Sales’

December 13, 2011  – Paul Lopez – National Association of Home Builders (NAHB)

Dear Mr. Lopez:

We are contacting you in reference to the attached NAHB press release dated Thursday, December 8, 2011, entitled, Flawed Appraisals Killing Home Sales, Hampering Housing Recovery.

As the Congressionally-authorized organization that establishes appraisal standards and appraiser qualifications in the United States, we feel compelled to address  aspects  of the press release we feel need clarification.

The  press  release  quotes  NAHB  Chairman  Bob  Nielsen  as  stating,  “The  inappropriate  use  of distressed  and  foreclosed  sales  as  comparables  in  determining  new  home  values  is  needlessly driving  down  home  prices,  killing  home  sales,  causing  more  workers  to  lose  their  jobs  and delaying  a housing and  economic recovery.”  Mr. Nielsen is also quoted as stating, “This is not only unfair and unreasonable, but it perpetuates the cycle of declining home values, drives more home owners underwater, harms local economic activity and acts as an obstacle to the recovery of the housing market.”

It is critical to understand that appraisers do not determine property values; they simply reflect the actions of buyers and sellers in the marketplace.  An appraiser’s role is to “mirror the market” by analyzing  the  actions  of  buyers  and  sellers  in  the  marketplace  to  produce  a  credible  opinion  of value.

The  press  release  also  refers  to  “faulty  appraisal  practices,”  where  “brand  new  homes  with sparkling  appliances  and  interior  upgrades  get  compared  to  a  distressed  property  that  has  been sitting vacant and in disrepair.”  All things being equal, it is certainly true that the more similar a competing property is to the subject property, the better a comparable it is likely to be.  However, there  are  often  reasons  why  an  appraiser  may  have  to  consider  comparables  that  are  not  as physically similar to the subject property as may be desired.

One  key  component  in  appraisal  theory  is  the  Principle  of  Substitution,  which  essentially  states that knowledgeable and typically motivated buyers would not pay more for a property if a similar property  could  be  built  (or  if  competing  properties  are  available  in  that  marketplace  at  a  lower price).  The press release claims that 53 percent of builders surveyed reported appraised values that came in lower than the cost to construct.  A concept many builders often fail to recognize is that cost does not equal value.  In “depressed” markets, it may be common for buyers to be unwilling to pay the full cost to construct a home; in appraisal, this is known as external obsolescence, which is a loss in value due to factors outside the subject property.  In these cases, that loss is attributed to a market where buyers have set a “limit” on the amount they are willing to pay, regardless of the cost to build.

While few would argue that a new home is not physically similar to a home that is in “disrepair,” the effect of such properties on new home sales must be analyzed by the appraiser.  For example, in marketplaces where many of the properties being bought are distress sales (e.g., foreclosures, bank-owned properties, short sales, etc.), it is not only permissible for appraisers to consider and potentially use these sales as comparables (or “comps”) but appraisers are required to determine the impact this activity is having in the marketplace.  This is due to the fact that distress sales may very well impact the value of more “conventional” sales, because in several markets buyers may be  reluctant  to  pay  more  for  any  property  than  the  price  level  set  by  the  distress  sales  (note  the reference to the Principle of Substitution made previously).  Further, if the number of distress sales (or distress properties available for sale) becomes so significant in a marketplace that it represents virtually the only activity occurring, the distress activity may actually become the marketplace.

The  press  release  also  states,  “These  appraisal  practices  are  a  major  contributing  factor  to  the current  acquisition,  development  and  construction  (AD&C)  lending  crisis  that  has  choked  off credit for home builders and threatens to prolong the current housing downturn.  Falling appraised values  for  land  and  subdivisions  under  development  have  led  some  financial  institutions  to  stop lending  to  developers  and  builders,  to  demand  additional  equity  and  even  to  call  performing loans.”

It is important to recognize that all state licensed and certified real estate appraisers in the U.S. are required by the Uniform Standards of Professional Appraisal Practice (USPAP) 1 to be independent, impartial, and objective, and to perform assignments without bias.  Furthermore, the Dodd-Frank Act passed by Congress and enacted in 2010 mandates appraiser independence, and establishes  penalties  for  lenders  and  other  parties  who  attempt  to  unduly  influence  an  appraiser. To  even  suggest  that  appraisers  are  subjective  in  the  performance  of  their  appraisals  is contrary to an appraiser’s most basic ethical obligations under USPAP.

Lastly,  the  press  release  states,  “Since  Sept.  2009,  NAHB  has  held  four  appraisal  summits  in Washington with representatives of federal banking regulators, the appraisal industry, the housing finance  industry,  the  real  estate  and  housing  sectors  and  others  to  find  solutions  that  will  allow appraisers  to  develop  realistic  valuations  based  on  sales  that  are  truly  comparable.”  The  press release  also  adds,  “The  need  to  give  top  priority  to  addressing  the  complexity  of  property valuations in distressed markets and impediments to the flow of appropriate information on homes between  appraisers  and  interested  parties  was  discussed  during  the  most  recent  summit,  which occurred on Oct. 19.”

We  wish  to  emphasize  that,  in  response  to  your  invitations,  The  Appraisal  Foundation  has participated in each of the four appraisal summits referenced in the press release.  In addition, The Appraisal Foundation stands ready to continue to work with NAHB to assist in understanding and resolving any appraisal-related issues.

Sincerely,

John S. Brenan
Director of Appraisal Issues
The Appraisal Foundation

The Appraisal Foundation Responds to NAHB December 8 Press Release on ‘Flawed Appraisals Killing Home Sales

Image credit flickr - Diana Parkhouse
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2 Responses

  1. Retired Appraiser Retired Appraiser says:

    What people fail to grasp, or should I say refuse to grasp, are these simple facts:

    From an appraisers perspective, the housing market has been quite complex since late 2008 and become more complex every month because of the leve of foreclosures. Experienced appraisers are needed more than ever in this type of market to provide solid research and credible valuations.

    Experienced residential appraisers have been fleeing the business in larger and larger numbers since late 2008. Why? Their experience was rendered worthless in 2009 with the advent of HVCC which continues today under Dodd Frank. The new reverse auction style business model that now exists for hiring appraisers favors the auction house (bank owned AMCs) and the lowest bidders (new appraisers).

    Once the entire appraisal profession was handed to green appraisers the future became quite predictable: an accelerating downward spiral of home values and an upward vortex of foreclosures.

    Why they are surprised by what they are witnesses is amusing to say the least. This was nothing short of a self fulfilling prophecy.

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  2. Retired Appraiser Retired Appraiser says:

    Here is a link to another article that supports the theory that I stated above:

    Appraisal Challenges: Straight from the Battlefield

    Do a quick Google search for blogs regarding HVCC & Dodd Frank and you will find countless stories regarding experienced appraisers who have chosen to leave the lending side of the residential appraisal profession to the new guys. These are people who are intelligent enough to know that the risk is not worth the reward. In my opinion these assignments would not be worth the reward if there were no risk involved.

    Few experienced appraisers would be on target in today’s market because we have witnessed nothing similar since the 1930s. Doesn’t take a rocket scientist to figure out that when you turn residential based valuation over to lesser experienced appraisers the market will tank.

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AI Response to NAHB on Appraisals Killing Home Sales

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