With mortgage rates hitting new lows, more consumers are seeking to take advantage of a good thing and either buy or refinance homes. More consumer interest means appraisers will be called upon more to deliver property valuations.
While more work requests is always a good problem to have, there are some side effects to bear in mind next time you're in the field.
Market Value vs. Market Trends
Market values lag behind market trends. Likewise, appraised estimates are slow to catch up to fluctuations in mortgage rates. Valuations are derived from historical property data and suitable comps from the previous six months, not current listing prices or what buyers are willing to pay. Appraisers must make adjustments for time, such as contract date, as well as market conditions, such as foreclosures and short sales.
Large price jumps are difficult to support, yet small increases in value can be factored in. Each time a home sells in a neighborhood at a higher price than the last, that sale becomes a viable comp for the next similar subject transaction. These incremental price increases are the stepping stones to raising fair market values and catching up with market trends.
Appraisers received much blame for creating the housing bubble by overvaluing properties; conversely, they're now receiving similar flack for preventing housing market recovery by undervaluing homes. Given all the regulation and criticism appraisers have had to shoulder since the crash, it's no wonder everyone seems to be staying on the conservative side of valuation.
It's true that low appraisals can be total deal killers. When an appraisal doesn't support a sales contract and it is subsequently broken, it's seen as faulty and complaints typically ensue. Not only do realtors lose the sale, but buyers and sellers may turn to another broker to get their loan. Financial loss due to missed sales does not go unnoticed by lenders and AMCs, who want deals to transpire. As a result, appraisers may see less and less referral work from these lenders and AMCs.
Due to the housing crash, fewer homes have been sold in recent years. Whether in rural or metropolitan areas, there are fewer adequate sales comps to draw from. Therefore, it's more likely appraisers will need to use neighborhood comps from foreclosures and short sales that share similar physical characteristics to the subject property, which contribute to alleged undervaluation. Still, without a decent pool of proper sales comps, it's difficult for appraisers to scientifically support higher market values.
No Place Like Your Neighborhood
It's no secret that AMCs award work to appraisers with the lowest bid. Oftentimes, these appraisers are out-of-towners who aren't familiar with the nuances of the subject property's neighborhood, such as the most desirable streets or whether a comp backs up to a major roadway. Real estate is nothing if not local, and comprehensive location knowledge is crucial to appraising properties at their true market value.
Non-local appraisers will need to rely more heavily on unverified MLS listings, property tax records and county records for analysis. However, this poses a greater risk of errors and omissions claims. When sales don't close, sellers become unhappy. Disgruntled sellers who feel their homes were undervalued can file claims with the state. Without area expertise, appraisers will have a more difficult time justifying how they arrived at their valuation opinion.
Now It's Your Turn
What effects do you see mortgages rates having on your career and bottom line? Join the discussion in the comments below.