New Rules on Home Appraisals End Up Thwarting Many Sales

"“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” "

10 years too high, 1 month too low. Sounds fair to me.

Fair? Say it ain't so, REO! There's at least another 9 years and eleven months still to go, right?

hyberbole

unrealistically low = less than I thought it was worth.

or:

unrealistically low = less than I need to cover my costs.

or

unrealistically low = that's what happens when you eliminate conflicts of interest.

Yes, I was kidding, REO. Does sound like a knee-jerk response to the incredible levels of corruption that were occurring in the appraisal world until recently, though.

nope, definitely

unrealistically low = killed the deal (i.e. didn't cover required LTV)

Nope, unrealistically low = unrealistically low.

We just had our condo in the Parc Vendome appraised as a condition of our purchase of another apartment. Studios in this building have recently traded in the low $600Ks; most valuations up to $570K would be reasonable, and I put $520K down on our mortgage app. because I am EXTREMELY conservative.

The appraisal, however, came in at $400K even.

It doesn't matter to us because we are keeping the condo, but I mentioned the number to my real estate lawyer (30 years, we're using Barry) and he said he was seeing it a lot now, "because appraisers don't want to get sued."

ali r.
{downtown broker}

“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” said National Association of Realtors Chief Economist Lawrence Yun

This is dumb , he's paid to represent an interest..

Naked Capitalism responds...
http://www.nakedcapitalism.com/2009/06/low-appraisals-blamed-for-keeping.html

When home values come in below the sales price, that’s not the appraiser’s fault, it’s a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement yesterday

This is how it used to be done....
PLEASE! Before Clinton it was done like this...
HUD Secretary Henry Cisneros Modifications to Deregulate Lending in '93 and ‘94
Did HUD Secretary Cisneros Deregulation Contribute to Predatory Lending and the Foreclosure Crisis?
February 18, 2008
By Janet Ahmad
On January 7, 1993 HUD issued Mortgagee Letter 93-2, Mandatory Direct Endorsement Processing gave authority to the Homebuilder owned lenders like KB Mortgage and affiliate lenders like Countrywide independence to approve their own loans. Without oversight of the industry by HUD, loan approval for single family direct endorsement, Cisneros officially put the foxes in charge of the henhouse.

Then on November 7, 1994 HUD Secretary Henry Cisneros approved Mortgagee Letter 94-54 that allowed lenders to select their own appraisers. As stated: “The Department (HUD) will rely upon lenders to assure that only knowledgeable appraisers are chosen to perform HUD appraisals and will rely on the integrity of each individual appraiser

What the realtor spokesman don't want to say , is that if the borrower defaults the bank has effectively bought or been PUT the property. They have a very real incentive to appraise conservatively. The days when the loans were pawned off on investors via securitzation are over at least for now..

The entire purpose of the appraisal industry it to thwart sales. If a buyer and seller agree on price that doesn't mean it's the right price. Why have an appraisal industry if they are just going to rubber stamp every sale? Appraiser are there to protect the uneducated buyer from paying too much and to protect the lender from lending too much. It's too bad appraisers were asleep at the switch over the last several years. They are one of the many industries who could have prevented this economic collapse from ever happening.
At least now it seems they are getting back to basics.

"Studios in this building have recently traded in the low $600Ks"

You don't seem to realize that 5 years ago you could have gotten a 2-bedroom 1-bath apartment for that price in a prime neighborhood. Here's an example of two nearly identical apartments, 1 floor difference:

06/09/04 1D Studio $325,000
09/08/08 2D Studio $500,000

http://350bleecker.com/policy/sales.html

That's a 54% increase in just FOUR years. Real estate does NOT appreciate that quickly. Nothing does.

"Comps" are what things sold for in the past - not what they're worth today. A proper comp would be to compare cap rates, or market rents, not what some idiot overpaid for a place to live last year.

unrealistically low = end of bubble mentality.

steve, five years ago I made around $85,000. A $600K apartment was out of my reach then.

ali r.
{downtown broker}

I think he meant "one could have gotten", not "you could...".

I still think Ali has a point here - if they're undershooting on purpose to avoid any type of litigation, appraisals could well be too low. As with many things, the truth probably lies somewhere in the middle.

"five years ago I made around $85,000. A $600K apartment was out of my reach then."

What does that have to do with anything?

Facts are facts - no asset increases 54% in value in just four years and stays there. Especially an asset that is really a liability as you owe an enormous amount of money on it, and it produces no income. It is basically an expense.

A $600k apartment with a typical 80/20, 30-year mortgage at 5.5% will have mortgage costs of $2725 per month. Common charges and taxes in that building are about $1,000 a month. Total costs = $3,725 per month.

You can rent a 2-bedroom 2-bathroom at the nearby Ellington for $3,200 a month. Why would you spend $500 MORE a month to get the right to live in a studio?

Here you have a studio that costs this:

Down Payment $119,800
Mortgage Amount $479,200
Mortgage Payment $2,721
Total Monthly Payment $3,715

http://www.streeteasy.com/nyc/sale/412591-condo-353-west-56th-street-clinton-new-york

Here's a rental at the Ellington:

http://www.nybits.com/apartmentlistings/b8eb1a354ad110ccc390599e39155564.html

$3,585 for twice the space, and when you factor in the 1 month's free rent, the effective rent is $3,286.

That same $599,000 studio is for rent for $1,950:

http://www.streeteasy.com/nyc/rental/451506-condo-340-west-57th-street-clinton-new-york

after a significant price decrease:

01/08/2009 Previously Listed in StreetEasy by Evans Real Estate at $2,950.
01/12/2009 Listed in StreetEasy by Evans Real Estate at $2,700.
03/19/2009 Price decreased by 28% to $1,950.
04/10/2009 Evans Real Estate Listing rented. Last priced at $1,950.

Another studio the same size wants $2,400, after a SERIOUS price reduction:

11/27/2008 Previously Listed in StreetEasy by Prudential Elliman at $4,000.
01/22/2009 Delisted temporarily by Prudential Elliman.
04/24/2009 Listed in StreetEasy by Corcoran at $2,400.

http://www.streeteasy.com/nyc/rental/497611-rental-333-west-56th-street-clinton-new-york

You don't seem to understand the economics of housing, seem to believe that properties were worth what people were willing to pay for them during the largest asset bubble in the history of the world.

They were not.

sorry about the multiple posts - it was "too many links"!

Steve, there is a school of thought that things are worth exactly what people are willing to pay for them. The simple fact is, due to lower actual or perceived income, most people are not willing to pay as much now as then. It's not a hard thing to grasp.

"there is a school of thought that things are worth exactly what people are willing to pay for them."

There is that school, and in the long-term it is correct. But in the short-term markets are extremely irrational.

That's point one. Point two is the rest of that theory: people are willing to pay for the output value of the goods they purchase. To do otherwise would be to overpay, and rational consumers will not by definition overpay.

The output value of buying a place to live is market rents.

ali: for fun, i just looked at the listings at parc vendome

5J on the market for $549; 6K at $599? $525 doesn't seem so conservative. what am i missing here?

"things are worth exactly what people are willing to pay for them."

- well not with housing anymore...now that the appraisers report to the banks (they are independent but ironically all owned by the banks) and not the brokers you can pretty much not worrying about overpaying if you are a buyer...

Then again if you are a seller or refinancer you better get on the "repeal Cummo now bandwagon"

Although in the end he is right and now conflicts of interest have been removed from the process...unfortunately this will lead to the next leg down in real estate as the banks, not the buyers will dictate housing prices...

Guess which way they will go

http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/06-23-2009/0005049229&EDATE=

WASHINGTON, June 23 /PRNewswire/ -- The following statement may be attributed to the Appraisal Institute's Bill Garber, Director, Government and External Relations. It is in response to today's comment by Lawrence Yun, National Association of Realtors chief economist, that the increase in existing home sales in May 'is less than expected because poor appraisals are stalling transactions. Some contracts are falling through from faulty valuations that keep buyers from getting a loan.'

"We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.

"It should be pointed out that neither the buyer, the seller, the Realtor nor the builder is the client of an appraiser in a typical real estate transaction. In transactions where buyers are seeking loans, our clients are the lenders. Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don't act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately help ensure that lenders loan the proper amount, buyers don't pay too much and sellers get a fair price.

"In these complex markets, it is particularly important that lenders use only the highest caliber of appraisers. Members of the Appraisal Institute holding the MAI, SPRA or SRA designation have met extensive experience and education requirements and must comply with a strict Code of Professional Ethics and Standards of Professional Appraisal Practice."

The Appraisal Institute is a global membership association of professional real estate appraisers, with over 25,000 members and 91 chapters throughout the world. Organized in 1932, its mission is to support and advance its members as the choice for real estate solutions and uphold professional credentials, standards of professional practice and ethics consistent with the public good. The Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SPRA and SRA designations.

"There is that school, and in the long-term it is correct. But in the short-term markets are extremely irrational.

That's point one. Point two is the rest of that theory: people are willing to pay for the output value of the goods they purchase. To do otherwise would be to overpay, and rational consumers will not by definition overpay.

The output value of buying a place to live is market rents."

Totally agree on the first point, Steve. Though, in my experience, markets are always at least a bit irrational - normal when there isn't perfect information.

On the second point, wouldn't you say the output value is future (expected) rents instead of simply market rents, or is that what you implied? I imagine that many people who bought (as an investment) relatively recently, did so in anticipation of continually rising rents (or at least net rising). I'm not arguing here, just trying to be as explicit as possible.

Yes, bjw, you are correct. Your comment on point two further supports rhino's well-stated case that owners' carrying costs must be LOWER than market rents at the outset of any purchase, this because buying a home is a hedge against future rent increases (it is a capitalized expense). If you expect rents to increase in the future, you would need presently to be paying significantly less in carrying costs for that to pay off. Otherwise, you would be overpaying.

The purchase cost must be amortized over the time frame you expect to hold the unit for, and it must include ALL costs, even transaction costs. Most people own their home for from 5 to 7 years. Rents on average increase along with wages (about 1% real per year). You would then need to discount those cash flows and compare which is cheaper.

"owners' carrying costs must be LOWER than market rents at the outset of any purchase"

I don't get how that math works. If I buy a place I would be willing to have the carrying costs be slightly higher than comparable rent. Because by and large my carrying costs will be flat vs. rent which would increase with inflation. In reality carrying costs increase as well because of increasing real estate taxes, common charges, and for fixed payment loans, the decreasing tax deductibility caused by increasing principal repayment and lower interest payment in the out years. Either ways, its safe to assume that carrying costs will grow slower than rent inflation.

"ts safe to assume that carrying costs will grow slower than rent inflation."

No it's not. Your carrying costs will NEVER go down. Rents do. There is a risk premium to ownership, and very high transaction costs.

Ah, i see, you are assuming a declining rental market.

"The purchase cost must be amortized over the time frame you expect to hold the unit for, and it must include ALL costs, even transaction costs. Most people own their home for from 5 to 7 years."

I agree, though don't think carrying costs HAVE to be less than rent at the outset. If you foresee significant rent increases that eventually surpass carrying costs (and this can happen, as Special_K said), you can still come out ahead. I'd also add that while the average length of ownership is probably around 5-7 years as you say, the fact that many people don't fall into that range makes this a very hard thing to measure on such a global scale. Every case will be different.

"Your carrying costs will NEVER go down. Rents do."

Sure they can. Assessments expire, costs of fuel go down, budgets are too conservative, refis occur. It's not the most common thing in the world, but silly to say "never."

"you are assuming a declining rental market."

No. I am assuming that long-term rents increase with incomes. The correlation is 99.9%.

one problem with appraisers is that they sometimes give low values in anticipation that values are goign to fall more. This is NOT their job. Appraisers are supposed to value a property at what it is worth RIGHT NOW.

one problem with appraisers is that they sometimes give low values in anticipation that values are goign to fall more

Source please. This sounds like unsupported supposition.

http://livinglies.wordpress.com/2009/05/01/cuomo-spotted-appraisal-fraud-as-core-problem-in-2007/

Graham Albertini, a former WaMu appraiser who now works for Hagar and teaches appraisal classes, said the bank’s appraisal process has been increasingly problematic since 2002.

“Starting in 2002 they shifted the emphasis from quality to quantity,” he said.

Appraisers have been complaining with increasing vehemence in recent years about the kind of pressure Cuomo described, saying it has enabled buyers to overpay, leaving many with mortgages for more than their homes were worth.

The traditional role of appraisers was to provide some protection for lenders, who wanted to make sure they could recoup their money if they had to foreclose. But in recent years, appraisers have increasingly been getting their work from mortgage originators representing lenders and banks that almost immediately sell off mortgages to Wall Street investors.

Steve,

Do you still think that 350 Bleecker is a good representation of what's happening to New York real estate prices?

"No. I am assuming that long-term rents increase with incomes. The correlation is 99.9%."

So if rents increase and my carrying costs growing at a slower rate, then how does that math work? You should be willing to pay more in the ST because in the back-end rents will increase to far surpass carrying costs. this is true for anyone who bought back in the day- let's say you bought 10 yrs ago, in 1999. carrying costs on the apt that was purchased at that price will definitely be less than rent today, even with a 10-15% decline in rents from peak last year.

""Your carrying costs will NEVER go down. Rents do."

Sure they can. Assessments expire, costs of fuel go down, budgets are too conservative, refis occur. It's not the most common thing in the world, but silly to say "never.""

Rent and carrying costs can go up, and then can also go down.

Of course, rents generally go up with an improved economy (outside of stabilized). Common charges can go up in lousy economies. Buildings running into financial problems, or cities in bad shape, can cost owners more.

So, in terms of risk factors, AOTBE it is usually preferable to take the one that doesn't make bad times worse.

I am wondering how many sales that are torpedoed by low appraisals (and hence no mortgage approval) are entirely dropped and how many are renegotiated by the sellers. it would stand to reason that barring a buyer with all-cash offer, other potential buyers are going to run into the same situation when applying for a mortgage, and if the sellers need or want to move soon, they have to do something.

I think that this is more of a discussion of having appraisers come into the area that they nothing about and try to do appraisals. For condos and houses, you may get away with. There's ACRIS and DOH that tell you the recent sale price and sq ft. They say nothing about the condition though. For coops, you have no idea from ACRIS or DOH about the size, just the sales price.

Take a Suffolk County/Rockland County appraiser who comes to appraise an apartment on 83 St and Lex. He gets a comp from 90 St and York that has views of the water. He will give the comp a lot of additional $$$$$ for the views, but will not discount that 20 min walk to the train or shopping. The appraiser will not have access to the area's MLS or at least to the brokers who sell there. Sorry, the apraisal is as good as closing your eyes and throwing a dart.....

Seems the appraiser makes a great scape goat. Creidt to Forbes for pointing out Yun works for a trade group and is essentially a paid lobbyist.
http://www.forbes.com/2009/06/23/home-sales-realtors-business-housing-appraisals.html

Lawrence Yun, chief economist at the trade association, credited government-sponsored efforts for boosting sales, including low interest rates and the $8,000 new homebuyer tax rebate, but lamented, "Some contracts are falling through from faulty valuations that keep buyers from getting a loan."

Guy Cecala, publisher of Inside Mortgage Finance, an industry publication, isn't surprised by the finger pointing and expects the blame game will continue for at least a year. "Appraisers have been the scapegoats for a lot of things.

"Rent and carrying costs can go up, and then can also go down.
Of course, rents generally go up with an improved economy (outside of stabilized). Common charges can go up in lousy economies. Buildings running into financial problems, or cities in bad shape, can cost owners more.
So, in terms of risk factors, AOTBE it is usually preferable to take the one that doesn't make bad times worse."

Yes, both can move in either direction. I'm not sure I agree about the correlation between common charges and the economy. I think we can all agree the economy is not doing so well as of late, yet construction costs, fuel, and labor costs have come down. Finding a well-run, stable building is really the key with owning, and that can certainly change drastically from one to another.

"So if rents increase and my carrying costs growing at a slower rate, then how does that math work? You should be willing to pay more in the ST because in the back-end rents will increase to far surpass carrying costs. this is true for anyone who bought back in the day- let's say you bought 10 yrs ago, in 1999. carrying costs on the apt that was purchased at that price will definitely be less than rent today, even with a 10-15% decline in rents from peak last year."

Exactly why I disagree with a purchase ONLY making sense if carrying costs are lower than rent at the outset. They don't move in perfect unison.

89% of 2-bedroom rentals in all of Manhattan are asking over $3500, but steve uses a $3200 cherry-picked example as his basis for the market. What a joke.

that's a 9.4% difference... I thinkz the mkt's asking price in NYC has a 20% variance from ask to sold. On a FSBO there's a 6% gap from brokerage listing right there... there a a ton more "no-fee" deals on rentals... so BIG WHOOP... $3,200 vs. $3,500...

No, $3500 is the bottom 10th percentile. The median is significantly higher.

Assumptions are beliefs or ideas that we hold to be true — often with little or no evidence required. We make assumptions every day of our lives; for example, as a driver on the highway, I assume that other drivers will obey traffic signals, so that when I go through an intersection with a green light, I assume that the cross traffic will stop at its red light.

http://papyr.com/hypertextbooks/comp2/assume.htm

http://www.infidels.org/library/modern/mathew/logic.html

From steve: If you expect rents to increase in the future, you would need presently to be paying significantly less in carrying costs for that to pay off. Otherwise, you would be overpaying.

So if you expect rents to rise in the future, you HAVE to pay less to own on day one or else you are overpaying. steve's theories = Lunacy.

LICC so if you expect rents to fall => ?

"steve's theories = Lunacy"

Steve's theory = risk premium.

And since you think I'm a lunatic, LICC, WHERE ARE YOUR NUMBERS TO DISPROVE ME?

http://www.streeteasy.com/nyc/talk/discussion/12059-renting-vs-buying-in-this-economy?page=6

If you expect rents to fall, and prices to follow, you should wait before buying. However in steve's world where nothing is rational, the answer may be different.

http://www.youtube.com/watch?v=teMlv3ripSM

WOW, Riversider!

Spot on.

LICC - why won't you publish your numbers?

"It should be pointed out that neither the buyer, the seller, the Realtor nor the builder is the client of an appraiser in a typical real estate transaction."

That's right: it's the banks. So when the banks want to lend on cardboard cartons on Avenue D and 6th St., miraculously every appraisal comes in. And when the banks don't want to lend, appraisals come in lower. Because if an appraisal firm didn't toe this line, the banks would simply pick different appraisers. It's not because appraisers don't want to get sued, because if that was their worry, they wouldn't have been doing what they HAVE been doing for the past 10 years. Wait.... WTF am I talking about? Past 50 years.