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Home Publications Blogs Beat the Press Uninformed Appraisals Should Lead to Inaccurate Appraisals, Not Low Appraisals

Uninformed Appraisals Should Lead to Inaccurate Appraisals, Not Low Appraisals

Tuesday, 01 March 2011 05:07

USA Today reported that many home sales are not going through because the appraisals are too low to support the mortgage. At one point it reports complaints from realtors that appraisers now often come from outside the area and make low appraisals because they don't know the housing market.

If appraisers are unfamiliar with an area then it would be expected that they would make inaccurate appraisals. This would mean that there might be mortgages that don't go through because an appraisal comes in too low, however some mortgages may end up being issued that should not be because the appraisals are too high. There is no obvious reason that the appraisals would be biased on the low side.

Comments (9)Add Comment
¡Boost, don't Knock!
written by John H. McCloskey, March 01, 2011 5:33
"There is no obvious reason that the appraisals would be biased on the low side."

I don't know about ‘obvious’ but it seems at least conceivable that George Babbitt is a microchauvinist who takes for granted that every building in Zenith is better than it looks.

(( http://www.quotationspage.com/quote/555.html ))

Not an appraiser myself,
written by Bill H, March 01, 2011 9:54
but is seems to me that a non-local appraiser might be overly inflenced by "comparable sales" many of which might be short sales, and under influenced by less tangible factors such as school quality, traffic patterns, location in relation to downtown and shopping, etc.
appraisal is an art not a science
written by chicago realtor, March 01, 2011 10:24
If you thought appraisals were bad in 2006, you should see them now. I just went through a process with buyers whereby we had three appraisals done (they were paying cash, and I wanted to make sure that they were not overpaying for the house) and the appraisals, which were conducted by three separate long-time appraisers with a combined total of 69 years of experience, came in at $413,000, $457,000 and $498,500. If that doesn't convince people that appraisals are not an effective way of determining value at this point in the housing crisis, I don't know what will. Interestingly, my buyers thought that they were getting a fair deal at the contract price of $475,000---which they determined after we had looked at more than 50 other properties before making the offer---and they went ahead with the purchase. Personally, I would have renegotiated the price.
written by Bill, March 01, 2011 11:46
I hate to be defending the realtors, but I would point out that when people (and even appraisers are people) are uncertain, they will err to whatever side they view as "conservative" - in this case, they will tend to give lower numbers on average.
Appraisers erred on low side? What planet?
written by JL, March 01, 2011 2:23

Bill, almost all appraisers, General or MAI, don't err on the low side unless they don't want to eat!

Almost all appraisers are selected by the lenders and they know what's the numbers that the lenders need to get the deal approved by the Loan Committee or Senior Loan Committee. They drop a number that is low and not supported by the loan deal, everyone including the loan officer, his boss, the bank, title company, escrow company, all don't get anything.

Lenders know who gives them a number that makes the deal and appraisers who don't deliver that, will NOT get a second call.

Short sales are sales too...
written by Matt, March 01, 2011 6:09
@Bill H: last I checked, short sales were still sales - heck, in many markets they are a significant chunk of the sales. I could see excluding heavily-damaged REO from the comps, but short sales are still selling the same house.
Bring back Made As Instructed!
written by Jay Weiser, Assoc. Prof. of Law & Real Estate, Baruch College, March 01, 2011 9:29
You've hit it on the head. The New York Times Real Estate section has also run plaintive quotes from Realtors© and mortgage brokers that non-local appraisers "just don't know the market." The long-standing joke in the real estate industry is that the Appraisal Institute's MAI designation, http://www.appraisalinstitute....ucted."

Lenders know that regulators are looking over their shoulders at appraisals (at least for the moment), and Realtors© and mortgage brokers no longer control the flow of business that compels appraisers to hit the target valuations. (That's what they mean by "local knowledge.") Since Realtor© and mortgage broker earnings are based on completed transactions, naturally they're upset.
written by liberal, March 02, 2011 7:17
My take on this is informed by my home purchase of June 2008. (Yeah, yeah, I had been reading Dean, but the wife really wanted to OWN.)

Asking was something like $495K. We bid $450K, which was accepted. Appraisal came in at $450K. What an amazing coincidence!
Inaccurate appraisals can unjustly hurt sales
written by harrync, March 02, 2011 4:15
The numbers in my example are extreme, but they are only to show the principle that inaccurate appraisals can reduce legitimate sales in the aggregate: Assume 100 contracts, 10 at too high a price, 10 too low, 80 just right. Accurate appraisals: you get 90 sales, as you should. Now assume 50 appraisals absurdly high, 50 absurdly low, randomly assigned to the three categories. So of those 10 overpriced homes, 5 will now sell. But of the 90 correctly or under-priced homes, 45 won't sell. So you end up with 50 sales, when in a rational market you should get 90. Like I said, my numbers are not realistic, but they show the principle that faulty appraisals can unjustly harm sales.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.