Realty, Unreality: Are low appraisal values a problem in housing?
Separating facts from whoppers

Article Highlights

  • While appraised value can differ from contract price, 29% of pre-closing sales transactions appraise at exactly the contract price.

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  • 59% of pre-closing sales transaction appraise above the contract price.

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  • No one should be surprised that some subset of buyer-seller negotiated sales prices differ from an appraiser's determination of market value.

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Headlines such as Unrealistically Low Appraisal Values in Up Markets a Problem and Low Valuation in Home Appraisals Causing Steady Level of Contract Glitches are commonly used by the National Association Realtors (NAR).

Consider this statement: “Although 65 percent of Realtors® surveyed in September report no contract problems relating to home appraisals over the past three months,[1] 11 percent said a contract was cancelled because an appraised value came in below the price negotiated between the buyer and seller, 9 percent reported a contract was delayed, and 15 percent said a contract was renegotiated to a lower sales price as a result of a low valuation.”[2]

This gives the distinct impression that low appraisals are endemic since 35% of Realtors had at least one instance of a contract problem relating to a home appraisal. However, the fact that 35% experienced an instance of a low appraisal tells us nothing about the actual prevalence or rate of low appraisals being experienced in the marketplace. For that we would need to know the total number of appraisals covered by the survey and the number that came in low. Of course, information on the distribution of the lows and highs would also be helpful.

Poorly worded questions are at the root of this confusion. Consider if Realtors were asked: Over the past three months, have you experienced a contract that proceeded where the appraised value came in above the sales price? The result would certainly have been that nearly 100%, if not 100%, would have said yes, they had such an instance in the last three months.

No one should be surprised to find that some subset of buyer-seller negotiated sales prices differ from an appraiser’s determination of market value. After all, each property is unique and real estate an illiquid asset making price discovery more difficult.

To get the facts, Realty, Unreality turned to data published by FNC, Inc., which tracks a large dataset of recently completed purchase-mortgage appraisals. FNC looked at single-family home and condominium purchase-mortgage appraisals completed between January and June 2012 and found:[3]

1.    While appraised value can differ quite substantially from contract price, 29% of pre-closing sales transactions appraise at exactly the contract price.

2.    Fifty-nine percent appraise at above the contract price, with 23% appraising at more than 3% above the contract price.

3.    Twelve percent appraise at below contract price, with 3% appraising at less than 3% below the contract price.

4.    A majority of those appraising at below the sales price were low by more than 5%, while 0.7% were low by less than 1%.

FNC concluded that while “market-based appraisals have often been criticized for failing to support potential mortgage transactions—especially if the adjustments result in a lower appraised value than the contract price, our analysis reveals appraiser due diligence in the process of developing a market value opinion on the underlying collateral. Meanwhile, we find [88%] of appraisals provide a valuation that supports the contract price. As shown below, the evidence does not support the claim that low appraisal valuation has prevented contract closings.”



The strong upward bias in the results above as compared to a normal bell shaped curve clearly demonstrates appraisers are cognizant of the sales price, take this into account in developing a concluded value, and try to avoid coming low if possible (0.7% come in low by less than 1%).

This is good news in terms of protecting the lender and consumer as the appraisal process is supposed to be a check, not a rubber stamp. Ask the buyers who benefitted from a lower purchase as a result of an appraisal coming in low. NAR’s survey is useful in that it found that Realtors indicated about 40% of low appraisals resulted in the transaction being renegotiated to a lower sales price.

On the NAR’s statement that low appraisal values a problem, Realty, Unreality gives the NAR a Whopper-O-Meter rating of:

Notes:

[1] Data on appraisal issues are from a monthly survey for the Realtors® Confidence Index, posted at www.realtor.org. The findings from a panel of NAR members typically are based on more than 3,000 monthly responses.

[2] NAR, “Low Valuation in Home Appraisals Causing Steady Level of Contract Glitches”.

[3] Yanling Mayer, senior research economist, FNC, Inc. Housing Market Trends, FNC Study: How Local Market Conditions Affect Appraisal Valuations. Similar results were found for all periods studied, which went back to early-2010.

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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