Housing Market WTF

IMG_1498A friend of mine was all psyched a couple of weeks ago when she signed a contract for a condo in the Culver City area.  She had been shopping at or near the “low end” of the Los Angeles area housing market — $300k or less.   I have heard from more than one prospective buyer that, at this price level, there has been a bit of a buying frenzy.  Sellers are listing the homes for lowball prices in order to attract interest, and then buyers are bidding up the prices, offering cash, avoiding contingencies in their contracts, etc.  And the federal $8k tax credit is bringing in a lot of first time home buyers, such as my friend, at this level.

But my friend’s excitement turned to frustration and heartache as her lender’s appraisal came in many thousands below her contract price. She said that her lender has only been looking at “comps” from the last three or four months, when home prices in our area have essentially been bouncing along the bottom of the trough.  Just two years ago, my friend’s prospective condo was sold to the current owner for many thousands more than my friend’s successful offer.  Apparently, however, the bankers feel that area home prices should be even lower than they are now.

I get why the lenders are not looking at prices from two years ago, when the housing bubble was bubbling, to determine home appraisal values today.  But given that today’s home sale prices, including my friend’s contract price, are quite a few percentage points lower than they were a couple of years ago, and that we’ve already gone through a major housing market crash and overall economic crash, it’s difficult to understand why today’s prices are not seen as representative or nearly representative of today’s home values.  It seems like some lenders are being so skittish that a depressed home sale market resulting from their lack of lending could become a self-fulfilling prophecy.

Perhaps more importantly for our economy, the business of banks and other lenders is supposed to be lending.  If the lenders aren’t lending, what on earth are they doing?

12 Replies to “Housing Market WTF”

  1. Matt,

    I’m no expert on this stuff, but when the bank appraises the house, aren’t they basically figuring out how much they’d be able to sell it for if the new buyer defaulted on the loan? Perhaps they’re being overly conservative, but considering how many banks have gone out of business in the past year, it’s not hard to understand why.

    What we need is a stronger federal program to stem the tide of foreclosures. That will make banks feel more secure in this economy.

  2. You don’t understand at all how real estate appraising works. What the real estate appraiser uses for comps are recent house sales that are the same or very close square footage, the same or similar lot size, and it has to be in the same or a comparable neighborhood. If they can’t find a recent sale that matches those criteria, they have to start going back in time and out in distance. If there are ANY houses that reasonably match the criteria listed above, those are the comps that MUST be used. You can’t pick and choose comps to meet a predetermined value, despite what real estate agents and lenders would like to have done. (This is one of the big reasons we had a housing crisis in the first place… but that’s another story.)

    This means if you are trying to point at a house that is 5 miles from the house being appraised, across a freeway or major cross street, in a gated community (and the house being appraised is not) that house is not a comp.

    Mind you I’m glossing over a ton of stuff, but these are the biggies that people overlook.

    Cosmetic things like the statue on the lawn, the marble tile in the bathroom, a swimming pool — these things are only minor adjustments in value and do not appreciably affect the value of your home from an appraisal standpoint. They affect curb appeal if you are selling your house, but they do not really have any bearing on the appraisal other than condition adjustments. In fact for some things, like swimming pools, you never get back what it cost you to put it in.

    Another very important thing to note is that real estate agents and brokers are NOT appraisers and 99.9% of the time have no idea what they are talking about when it comes to appraising. They love to “offer comps” when they have no clue what the criteria for selecting comps are. So please do not under any circumstances listen to a real estate agent tell you anything about a house appraisal. They are always wrong and say whatever they like to get the sale.

    Lastly, you should be REALLY happy when an appraisal comes back and says the house is not worth what you are paying for. They are saving you a TON of money and keeping you from being ripped off. If the value from the appraisal is significantly lower than the sale price of the house, you WILL end up backwards on the loan sooner or later.

  3. I forgot to add that the price on the appraisal IS representative of the current value of the house. That’s the whole point of the appraisal. That’s why they find “comps” and use the sale values of those comps to come to a pretty accurate value of the house under consideration. The banks are not “deciding” the prices. The market is. So if your appraisal is coming in low, it just means that you are paying too much. If you have enough cash to make up the price difference you can still get the loan. But no lender in their right mind is going to lend you $300,000 on a house that is only worth $200,000.

  4. Appraisers are usually independant contractors. They have a fiduciary duty to make sure the appraisal is as accurate as they can based on comps that recently sold among other criteria. We got into the mess we are in partly because appraisers for a while were finding ways to meet contract and selling prices despite what the market was actually doing. When the crash came and fingers were pointed at them the honest ones tightened up their standards and the bad ones, well they just went away.

  5. I should have mentioned that I have been through this process several times and am quite familiar with it. My point is that, if appraisers, well-intentioned though they may be, are looking at the last 3-4 months, during the market trough, they may be getting a false picture of home values. That could for more months hinder a market that is trying to rebound, where there are buyers willing to pay a little more than 3-4 months ago and who still feel they’re getting a pretty good deal because in many cases, such as the one at issue here, the prices are much lower then they were 2 years ago.

    I also don’t agree with Scott’s views about “paying too much.” Again, it may be an isolated circumstance taking place now, but if all the appraisers look at is what may be the very bottom of a market, then at any other point in time home prices will of course look overvalued.

  6. You should take a course (or refresher) in math, statistics and finance if you disagree, no offense intended. If the buyers are willing to pay more and, here is the key phrase, have the finances to pay more, then the market will adjust because the property will sell for the higher value.

    If your friend, on the other hand, wants to pay more but does not have the money to cover the loan or more likely the money to cover the difference between the appraisal and the selling price, then the lenders are correct in denying his/her loan. Anyone who would lend in that situation would be out of business and/or asking for tax-payer money for a bailout in short order.

  7. Tell your friend to give the appraiser and bank a big thank you kiss. Housing here in SoCal still has another 20% downside before we reach any sort of realistic bottom. Once that bottom is reached we’ll be bouncing around down there for another 5-10 years before prices start to rise.

  8. Scott — OMG dude are we on different wavelengths. My friend has the money to pay the difference between the appraisal value and the contract price, but to think that having to pay all that extra $$ to get the place after already agreeing on a significantly lower price with the seller isn’t a source of frustration and heartache is just plain silly. No offense intended.

    Bromike — you might be right. No one has a crystal ball. One option certainly is to walk away (although she would be out the earnest money deposit) and hope that the market sinks again.

  9. Matt – I’d like to think that your friend is off the hook because the appraisal came in lower than the price offered. Thats a pretty standard edition to any basic offer to buy a house. If it wasn’t included your friend should kiss the bank and appraiser and punch his/her realtor.

  10. Matt — Dude, I’m with you that it’s frustrating and heartbreaking when the house isn’t worth what you were willing to pay (or borrow), but you don’t seriously expect the bank to lend the money because you REALLY REALLY REALLY want it???

    I guess I just don’t understand why you think a lender is being frustrating and inducing unnecessary heartache when they don’t want to lend the money on a property that is worth less than what your friend is paying since the house is the collateral for the loan. That’s the whole entire point of the appraisal in the first place and why the underwriters require the appraisal.

    Or are you saying you don’t believe that the real estate appraisal reflects the true market value of the house? If that’s what you are saying then there really isn’t much to discuss. They are accurate and they don’t just reflect the bottom of the market. They reflect the market right now which is what the bank cares about because conceivably your friend could start defaulting on the first payment and then they have sell the house to get their money back.

    But I’m with Bromike. If the seller is asking more than the house is worth I’m pretty sure they can’t hold the deposit, but I’m certainly not a lawyer.

  11. As a Realtor on the Westside (yeah, yeah – stop the bashing please we’re not all the same) I’m seeing exactly this sort of thing happen all the time — I think it important to point out that an appraisal is just one professional’s opinion on that day given the current conditions.

    You can hire a second appraiser (in fact, some lenders will require it) and get a completely different number. Your friend has the opportunity to negotiate at this point.

    The accuracy in the appraisal lies in the fact that you can’t get a loan without one! They could ruffle feathers by asking for another one, but risks are to be had, including losing out on the place. Either your friend wants it, or not. Plain and simple. Now the agents have to negotiate to make everyone happy.

  12. If you are getting more than about 10% difference in value between two appraisers, one of them is either really bad or pushing value. One of the big reasons for the huge bubble and it’s inevitable collapse is that appraisers (usually independents who need to get repeat customers to earn a living) would meet a preconceived value pushed to them by the lenders in order to get paid. Needless to say that is a huge no-no. But money talks I guess.

    And as for my bashing real estate agents, well, they come up with great quotes like, “The accuracy in the appraisal lies in the fact that you can’t get a loan without one!” That sums up why lenders don’t ask real estate agents how much a house is worth and why big lenders have their own appraisers. ;)

    In any case I have nothing further to add to this discussion so I will bow out.

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