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.

    Tweet This

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

    Tweet This

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

    Tweet This

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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Edward J.
Pinto

What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.