Appraisals Muddy Housing Recovery

Home Appraisal

Recently I wrote about the new Home Valuation Code of Conduct, which forces a sort of fire wall between appraisers and mortgage brokers/lenders. It has caused uproar in the appraisal industry, as new middleman threaten to chase local appraisers with local relationships out of business.

But now I’m hearing rumblings of another sort in appraisal country.

Thanks to the new surge in foreclosures after all those moratoria expired, many appraisers are comparing regular existing properties to foreclosure sale properties. “Appraisers are now more likely to compare new homes to foreclosures, which can be ‘apples and oranges’ in many cases,” says John Burns of California-based John Burns Real Estate Consulting.

In some markets, appraisals are contributing to price deterioration. Home builder analyst Ivy Zelman reports on a builder in California who says that it “had to drop prices on all sales in process 8 percent at one community due to appraisals coming in too low.” The same in Florida.

Spring Real Estate Guide 2009 | A CNBC Special Report

“We believe that overly-conservative appraisers could potentially prolong the process of price deterioration, as builders attempting to push price may encounter appraisal prices well below contract due to foreclosures and other distressed sales,” writes Zelman. “This issue is exacerbated by the recent Home Valuation Code of Conduct instituted May 1st, requiring third-party appraisals on all GSE-approved loans.”

I first got wise to this growing appraisal problem well over a year ago, when a Realtor told me she was having trouble with a sale in Bethesda, MD because the appraisal came in below the sale price. That was well before the real crash in credit, and Bethesda is not exactly a hotbed of foreclosures. I think appraisals are getting far too little attention in the jambalaya of housing rescue plans, and they may just be the hottest ingredient.

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