Have appraisals gone bad?
According to the nation’s home builders that may well be the case.
“The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices, killing home sales, causing more workers to lose their jobs and delaying a housing and economic recovery,” said Bob Nielsen, chairman of the National Association of Home Builders.
The Association says many builders have seen appraisals that are lower than contract prices.
“Too often, due to faulty appraisal practices, brand new homes with sparkling appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair,” the NAHB said in a news release. “The result, in many cases has been that the new house winds up getting appraised at less than the cost of construction.”
Given that most VA loans require a full appraisal the argument that professional valuations are routinely off the mark deserves some discussion.
The home builders essentially object to the idea that foreclosures and short sales impact local home values. In fact, there have been efforts in several states to require by law that appraisals exclude foreclosure and short sales from valuations.
The point of an appraisal is to determine the fair market price of a given property, not to verify a given number favored by either a seller or a purchaser. The value of any residential property is found by looking at many factors, but the most important is how much purchasers are willing to pay for like properties in the local area.
Can we compare a new home with a distressed property?
Homebuyers do it every day. They ask the question: Are we willing to pay less for a distressed home or more for a new property in mint condition? There’s no “right” answer. Different people will have different opinions, it’s a matter of finances and personal preferences.
According to the National Association of Realtors a lot of people prefer distressed housing, which are “typically sold at deep discounts.”
Market values are important because VA purchase loans and many refinance loans require a full appraisal. Lenders then originate mortgages on the basis of the sale price or the appraised value, whichever is less. One reason the VA requires a full appraisal is that such valuations are a form of consumer protection — if you’re the borrower then you’re also the “consumer” and you surely do not want to overpay for a home. Appraisals are also a form of lender protection because they stop lenders from making loans which are too risky.
It’s easy to understand the builders’ concern but the real problem is not appraisals. Instead it’s the effort to sell a big product with a premium price in a stalled economy. That’s a tough sell, especially in an environment with generally lower home prices and therefore generally lower appraisals — appraisals which do little more than document marketplace realities.
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