Real estate agent Laura Barnett put a Dallas-area house on the market three weeks ago and quickly received 22 offers, but she did not take the highest offer. Instead, she took the cash offer because that was the only way to ensure the sale would go through.
Sales and prices are moving so quickly in Barnett's market that appraisals are not keeping up. If the appraisal doesn't match the contract price, the buyer doesn't get the mortgage, and the deal dies.
"They're kind of putting a glass ceiling where we can't raise our prices any higher than we have comps to support it, so we're definitely going with more cash offers than we used to," said Barnett, an agent at RE/MAX DFW Associates.
The national median price of a home sold in June hit $263,800, a record, according to the National Association of Realtors. In addition, the average number of days a listing took to go under contract fell to just 28, down from 34 a year ago.
"Anytime prices move up fast, the actual appraisal process, because they're looking back in history, not forward into the future, they are lagging behind," said Lawrence Yun, chief economist at the Realtors group. "From the buyer's perspective, it's a tough situation where they want to rely on the value of the home, on the appraisal, yet they know that if they decide to back away there are other buyers waiting to pounce."
Lenders are now far more careful with appraisals than they were during the last housing boom. In turn, appraisers are being very cautious with the current price run-up.
"They are being instructed that unless they have actual comps from past sales, they cannot go on just the fact that they've been given multiple offers. They have to have comps to support it," Barnett said.
During the previous boom, just the opposite was happening. Appraisals were being inflated to push home prices higher, as investor-flippers sought big gains. The result was an epic housing crash that thoroughly spooked lenders.
That history gives today's cash buyers, many of whom are investors flipping homes for a quick profit, a major advantage over mortgage-dependent buyers. Once again, they're pushing prices higher artificially, but this time they are doing it without the banks.
Younger, first-time buyers, are often not only mortgage-dependent but also using low-down-payment loans, which tend to be underwritten more strictly. If the appraisal comes in even slightly under the contract price, the mortgage financing usually falls through.
"The cash buyers always push out the first-time buyers," Yun noted.
Another issue is simply the availability of appraisers. There are just not enough to handle the current market.
"The appraisal industry is a candle burnt at both ends," said Ken Fears, director of housing, finance and regional economics at the Realtors group, in a recent blog post. "Regulation, an altered appraisal market structure, and compensation issues burden those currently in the industry, while poor incentives make it harder to grow the next generation of appraisers."
With the supply of homes so tight across the nation, and some houses getting multiple offers in just a few days, the appraisal situation is unlikely to get any better. Cash has always been king in real estate, but today's youngest buyers appear to have less of it than previous generations. That will only add to the already tough competition for homeownership.