The Broken Property Appraisal System: What’s Next?
Even though the U.S. housing market is rebounding well, many are complaining that the property appraisal system is still broken. What’s wrong with the system? What can we expect from it in the near future? More importantly, how should home buyers, home owners, agents and investors be preparing themselves? Property appraisers have become even more hated than Realtors, investors and real estate attorneys in the wake of the last housing downturn. First, they were blamed for creating the bubble by pumping up home values – never mind that banks were behind pressuring them to do so. More recently, residential appraisers have been bashed for holding down home values and complicating the recovery due to extremely low appraisals. Again, many would argue this is due to exterior pressure. The housing market has fought its way back anyway. However, there continue to be major concerns both inside and outside of the appraisal community about the current state of the system, and where it’s headed to next. New concerns were recently raised in New York as appraisers voiced complaints and worries over AMCs and the direction of the industry. Appraisal Management Companies (AMCs) have been increasingly used by mortgage lenders for ordering appraisals. Theoretically, more third party buffers in between those ordering and having a material interest in the outcome of appraisal requests should be a good thing and make results neutral. Unfortunately, this is also adding a lot of administrative cost and a new party in business for profit. The result, according to appraisers, is that they are the ones bearing the brunt of this; resulting in field appraisers being paid less and less. It doesn’t take a brain surgeon to figure out that the great appraisers that value their time aren’t going to stick around for half the pay. Unless gas prices are slashed, it also doesn’t make sense for most to drive maybe 50 miles for $150. Ultimately, this means less experienced appraisers and only those that will work the very cheapest. Common sense says using minimum wage workers or less for handling what are the sum of many individuals’ lifetime wealth and millions of dollars in property, and even holding the fate of the global housing and financial industries might not be the best move. This really presents two serious threats to the quality and integrity of appraisals in the future. This is the quality and accuracy of the work, and potential for appraisers being swayed by bribes or the promise of more work. Appraisers will be in a corner when demand increases. Pressure to boost appraisal values to meet lender demands will occur. Mortgage lenders and banks are already getting very aggressive about putting money to work again and making large loans. More generous appraisals will create more loan origination opportunities and fuel faster home price growth. Rapidly growing home prices can certainly be good for homeowners, investors, lenders in terms of equity and wealth building. However, it can be less pleasant in terms of property taxes heading up. What can you take away from this? Buy homes now and be wise. Leverage can be great. Just use some common sense and don’t treat your home equity as a credit card for general every day spending.