Low appraisals are hampering home sales, but whether they're inaccurate is in dispute.
Ten percent of the nation's Realtors said they had sales canceled because appraisals came in below the prices buyers agreed to pay, according to a January survey by the National Association of Realtors. Another 15% said contracts were renegotiated after appraisals came in too low. Sellers dropped prices or buyers put up more cash.
A third of home builders said they had lost sales because of low appraisals, according to an August survey by the National Association of Home Builders. That was up from 26% in a 2009 survey.
Lenders often require appraisals before approving a mortgage to ensure that the house's value exceeds the loan.
Low appraisals were rarely an issue during the housing boom, when prices rose steadily. But the bust revealed how inflated appraisals had contributed to the housing bubble. Now appraisal and lending standards are both tighter.
Lenders and appraisers say falling home prices, not flawed valuation practices, drive low appraisals. U.S. home prices are 30% off their 2006 peak, and many economists expect them to fall more.
"In a rapidly moving market, the appraisal process becomes more difficult," says Robert Davis, executive vice president of the American Bankers Association. "Home prices are still falling, and there's a lot of people who can't believe they're that low."
Foreclosures are a key factor. Market researcher RealtyTrac says foreclosed homes accounted for almost 26% of sales last year, fetching 28% less on average than non-foreclosed homes. In some markets, foreclosed homes are a greater share of sales.
Appraisers may count those to determine values of non-distressed properties, and the appraisals may not reflect the superior condition of the latter, says NAHB Chief Economist David Crowe.
Beazer Homes, a national home builder, said in a recent Securities and Exchange Commission filing that "appraisals continue to be negatively impacted by foreclosure comparables," boosting home sale cancellation rates in some markets.
Also, since 2009, new rules have aimed to lessen lenders' ability to influence appraisers. That's led to more lenders outsourcing appraisal selection to other firms. They may hire appraisers who aren't as familiar with the neighborhoods of the houses they're valuing, Realtors say.
"You get people from one end of the state appraising stuff in the other end," says Don Hammer, manager of Realty Executives in Paradise Valley, Ariz. In his office, about half of all canceled sales are appraisal-related, he says.
In Lake Arrowhead, Calif., million-dollar homes are across the street from $250,000 weekend cabins, says Steve Keefe, owner of Coldwell Banker Sky Ridge Realty. Low appraisals led to canceled sales for about six of the 48 homes his office has handled this year. In many cases, appraisers had never been to the area before, Keefe says.
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