Faulty appraisals harming housing and the economy

Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by NAHB.

“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,” said NAHB Chairman Joe Robson.

The survey showed that nearly 60% of the builders are reporting that inadequate appraisals are causing serious problems in the market, with the biggest problem being comparables of new single-family homes that are too often based on foreclosures and distressed sales.

“Lost home sales are killing jobs, deepening the housing slump and hurting local economic activity,” said Robson, who noted that construction of 100 single-family homes generates 324 local jobs, $21.1 million in local income and $2.2 million in taxes and other revenue for local governments in the first year.

Of those who are reporting appraisal problems, 54% said that the appraisal amount was actually less than the cost of building the home.

Robson said that foreclosure and distressed sales should not be used without appropriate adjustments to reflect the expenditure that would be required to bring them up to the condition and quality that represents a reasonable alternative for the home buyer.

Clarification on Appraisals From Freddie Mac

In what Robson called a step in the right direction, Freddie Mac on July 10 issued a Guide Bulletin publicly stating that it does not require appraisers to use Real Estate Owned (REO), foreclosures or short sales in selecting comparable sales to provide an accurate opinion on home values based on market data. Freddie further stipulated that appraisers must “certify that comparable sales chosen are those most similar to the subject property.”

The clarification came as a result of NAHB efforts led by Immediate Past Chairman Sandy Dunn to resolve concerns over inappropriately low appraisals stemming from the use of distressed properties as comps.

The association’s concerns were communicated directly to Freddie Mac officials, who were asked to provide more explicit guidance on the appropriate use of comparables in distressed markets.

Exacerbating the AD&C Credit Crunch

While the appraisal practices currently in use are taking a heavy toll on the housing market, they are also further exacerbating economic distress by affecting the availability of acquisition, development and construction (AD&C) credit.

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, Robson said.

“If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole,” said Robson.

NAHB is calling on housing and federal financial regulators to adopt clear, concise regulatory guidance that will allow appraisers to develop realistic valuations based on sales that are truly comparable.

In neighborhoods where the comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative picture of the value of homes sold in the area.

“You can’t compare a well-constructed new home with a foreclosed property that has been vacant for months and was probably neglected for a long time before it was vacated,” said Robson. “Acting now to establish proper regulatory guidelines for those who use distressed or foreclosed properties as comps when determining home values will help to stabilize home prices and home sales and put people back to work.”