Appraisal shock impeding house sales, refinancing

When I use the term appraisal shock, today I mean the shockingly low values that appraisers are assigning to homes up for sale or refinance.

However, the shocks began early in the decade. Remember when our homes were going up in value by 10-20% or more a year? That was a shock, too.

Now, however, according to the Wall Street Journal (subscription), those same appraisers who were once pressured by the real estate and finance industries to assign inflated values to homes so purchasers could qualify for loans are being asked to go conservative. Banks and investors, so badly stung by the decline in housing prices, have become (dare I say, too late?) risk adverse.

What does this mean to the home owner or purchaser? Lenders already demand much better credit worthiness before forking over cash for real estate. Now, borrowers have to contend with appraisals that often fall well short of the expected evaluation, short enough to kill the deal.

Worse, the motivation to lowball house appraisals to minimize risk can have a cyclical effect on a neighborhood. Each home assigned a lower value could serve as a comparable for subsequent nearby appraisals. Even those with secure loans on houses bought a few years ago could find themselves suddenly upside down. Their home-secured lines of credit could also be frozen.

Complicating the matter is the move to offload appraisals to appraisal management companies, which operate with very sharp pencils. The low-cost-bidder appraisal service has its own perils.

It would be easy to state that what the market needs is appraisals that are free of market pressures to inflate or deflate, but the fact is that property values are always a moving target, more so now than ever, and an absolutely true evaluation is an illusion.

While the downward pressure on appraisals will inhibit the housing market, it also will serve to wean out borderline borrowers, perhaps saving a great deal of heartache for everyone down the road.

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