Appraisals lag home prices, crippling buyers
Those who need mortgages ‘out of the market’ say Realtors
“Sellers say ‘let’s go for the cash offer because we don’t have to worry about the appraisal’… People who need a mortgage are out of the market.” (Getty Images)
Nevada’s housing market is once again moving too fast for appraisals to keep pace with values and it’s sidelining would-be buyers who require mortgages, according to Las Vegas Realtors president Aldo Martinez.
“That’s a constant now,” says Martinez. “They are $40,000 off, $60,000 off. They aren’t even in the neighborhood.”
The gap between appraised and contracted price puts those who require mortgages — about four out of five buyers, according to data from LVR — on the hook to come up with cash or walk away.
The challenge to appraisers to keep pace with appreciation evokes memories of the pre-Great Recession housing market, when median home prices in Southern Nevada increased by 84 percent for three years before peaking in June 2006 at $315,000 and then plummeting.
Appraisals are based on historical sales data, but with rapid price growth — roughly two to three percent a month in Southern and Northern Nevada — the valuations are stale by the time they’re provided to lenders.
“Sellers say ‘let’s go for the cash offer because we don’t have to worry about the appraisal,’” says Martinez. “People who need a mortgage are out of the market.”
“I feel that banks are still following robust underwriting standards and most appraisals are justified due to strong demand and limited supply despite those factors not being part of the appraisal methods,” says Vivek Sah, director of UNLV’s Lied Real Estate Institute. “However, those factors do get indirectly reflected in comparable sales used in the appraisal process.”
While deals that are pending or under contract may receive some consideration from appraisers, it’s the closings that count.
“When you have multiple offers — when you can say to the appraiser ‘here are ten offers that were above list’ — it should have some effect on what the market should be able to bring,” says Martinez.
Appraisers, however, determine not market value but how much mortgage a lender should provide on a given property.
The two are not the same, says Ryan Lundquist, a Sacramento appraiser trying to keep pace as market prices rise 20 percent year-to-year and 11 percent in the last 90 days.
“What an individual is willing to pay doesn’t reflect the market,” Lundquist, who blogs about appraisal practices and issues, said in an interview, noting a person who is moving out of town and selling in a high-inventory market has incentives to accept a lower offer than in other circumstances. “Does that represent reasonable value or duress?”
Buyers in Sacramento are paying an average of $24,000 over asking price. Others are paying much more.
“The adjustments are greater than they’ve ever been,” he says.
“Some offers are disconnected from reality, so we should not be seeing appraisals anywhere near the contract price,” opines Lundquist on his blog. “We have a market where buyers are sometimes making irrational offers.”
Are appraisals based on what the market will bear or on data-driven value?
“It’s both,” says Petra Latch, 2021 president of the Commercial Alliance of Las Vegas. “Who is the market? If your buyer pool is paying above asking, they reset the market. Whether it’s sustainable is another issue. Does it price people out of the market? It certainly can.”
Rational or irrational, “a closed sale is a closed sale,” says Latch, who specializes in commercial real estate but also values new home developments.
“Market value is seller and buyer acting in their own best interest,” says Latch, who credits cash-rich buyers from California for setting the pace across the country with offers tens of thousands of dollars above asking price — especially in states with hot markets such as Nevada, Idaho, Texas, and Utah.
“Those are actual buyers. That’s actual demand,” she says of the auction-like atmosphere pervading the market. “If you go out and see five listings and all have offers $20,000 above asking, that’s what’s out there.”
Unlike their real estate sales and lending counterparts who earn higher commissions for transactions involving more expensive properties, appraisers earn a relatively flat fee based on square footage.
Kickbacks to appraisers from agents and mortgage brokers to ‘make the deal work’ became prevalent as the real estate bubble inflated in the early 2000s.
“Appraisers in the past got pushed around. There were a lot of inflated appraisals,” says Lundquist.
“The profession as a whole got into the practice — meeting the contract price or enabling the deal.”
Not all bad behavior has ceased, he says.
“There’s some really fishy stuff happening in real estate,“ Lundquist adds.
“Frankly, I don’t see the same signs as 15 years ago, as so much has changed in terms of appraisal standards and protocols,” says Sah at UNLV. “I don’t think appraisers today are under any pressure to accommodate crazy offers.”
Sah says he does not anticipate another collapse of the real estate market, despite the seemingly irrational exuberance of some buyers.
“Everybody wants to make comparisons with 2006/07 and the lessons learned then,” says Latch. “You have to look at the essentials of economics — basic supply and demand. When you have rapid changes, it’s hard to stay on top of appreciation.”
Incomes in Nevada fell 3.8 percent in 2020, largely because of the pandemic and the state’s reliance on the hospitality industry. Nationally, incomes grew at almost five percent, the largest gain in 20 years. At that pace, is double-digit annual home appreciation sustainable?
Lundquist says that’s not really his problem.
“In my appraisals I reflect the growth, but it’s not my job to reflect whether prices are sustainable,” he says. Regardless, most indicators suggest they aren’t letting up.
“We’re seeing more pending sales and more closed sales each and every month,” says Lundquist, who suggests prospective buyers looking for an easing in the market keep an eye on “the basic stuff” — mortgage applications, a decrease in pending sales, a drop in prices.
“There’s no such thing as a national market,” he says. “There are a lot that are resembling one another. If we hear of a lot of markets slowing, our antenna goes up.”
Listings are ticking up nationally, according to Lundquist, but many prospective sellers fear finding another home.
“I don’t think anyone feels confident that they’ll be able to find something,” he says. “Unless you’re downsizing or deploying a decade of equity, people are staying put. “
An increase in mortgage rates “would take a little bit of steroid out of the market,” says Lundquist, as would a return to pre-pandemic routine. “The closer we get to normal — kids in school, people back to work — we could see more people list their homes.”
Prospective buyers are also competing with industry giants such as home valuation platform Zillow.
“They purchased 340 properties in the last four or five months,” Martinez says of Zillow. “Since the first of the month they put an additional 140 into contract.”
Martinez says Zillow is acquiring homes for resale.
“But what it’s doing to the consumers who are looking for a home to live in is making them compete with a Wall Street broker looking for investment.”
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