Appraisal Issues in a Rising Market

Appraisals are a lagging index of the marketplace. The appraiser may use current listings to show market availability but the value will be represented by PAST closed sales. This is our best indication of market value but it creates challenges when a market is in a changing mode.

In the past five years we have covered a classic curve in the real estate market. As the values dropped, appraisals gave values slightly higher than sale prices. At the bottom of the market there were no current sales so values were difficult to predict. Refinance transactions were especially challenging during this period. As the market began to have activity, distress sales and bank owned transactions forced the final drop in values and appraised values were lower than expectations.

2012 saw a market that began in a distressed sale mode and cleared inventory to a  great extent. By year end, the shortage of inventory was evident. Listings were scarce and went pending quickly. Good properties received multiple offers. Fortunately the market was active enough that most appraisals could be justified at the sale price.

At the beginning of 2013 we see several signs that sale prices are increasing and may take a little jump up. The most evident dynamic , in addition to limited inventory, is new construction. Through the fourth quarter of 2012 and first quarter of 2013, builders have introduced multiple price increases. Low existing inventory will drive sales of new construction which will add higher comparable values to the market in general.

The ability to sell at higher prices may increase existing listings some but we will probably see continued shortage of inventory through the second quarter. This could create a jump in sale prices that cannot be supported by past sales. The result will be appraisals that do not support the sale price. Since lenders are tied to the lower of sale price or appraisal, it will be up to the buyer and seller to manage the shortfall of financing.

Whether this effects your transaction or not, it is an issue to be aware of and educate your client accordingly. This may help you get more listings. It may also negatively effect buyers short on cash. It is a good time to update the presentation to all of our clients.

For more info from Ed DeWitt visit Ed's blog.