Why Aren’t Home Prices Rising Faster?

Westcoe Realtors, Riverside California…Given that we have been saying for some time that we have this massive demand for property in our area, interest rates are really affordable, and that many properties are having 10-20 offers submitted for the seller to pick from, some of our clients are wondering why home values are not rising faster?  Common sense would suggest that with so many more buyers than sellers, prices should be increasing…at a much more rapid pace than they are. 

So why aren’t they?  While we are beginning to see some price increases, why aren’t home prices rising faster?  Simple…the appraisal industry.

Ok…before we get a call from a bunch of angry appraisers, please note that today’s blog is not an incrimination or indictment of any singular appraiser.  But the simple reality is that the appraisal industry has undergone so many changes and “improvements” in response to the real estate market meltdown of the past 3-4 years that it is now almost impossible for home prices to rise in reaction to the intense buyer demand. 

The appraisal industry took far too much heat for the rise in prices in the early 2000’s.  Unlike the horror stories that the government wants to put out about “appraisers in the pocket of banks, burying unsuspecting buyers in overpriced homes”, the reality is that this type of activity represented a microscopic percentage of business.  Yes, there were bad appraisers…just like there were bad real estate agents, bad banks, bad loans, etc….but the appraisal industry was no more responsible for the rapid rise of home prices than anyone else.

However, the appraisal industry was an easy target for politicians bent on producing the latest sound bite for the national news.  As a result, the rush to “protect the buying public” from this latest evil was a number of new laws enacted that has had hurt the good people who were left behind…and that is sad. 

How?  Let me count the ways.

1.  Appraisers no longer work for the banks, but for a corporate intermediary.  This is to keep an “arm’s length” between the appraiser and the bank.  “No more bank pressuring the appraisers” shout the headlines.  Now, when an appraisal is needed, the bank calls the appraisal company, and this company sends out a random appraiser…an appraiser who may be from over 100 miles away!  No longer can the bank use a local appraiser familiar with the idiosyncrasies of the area.  Come on…do you really think an appraiser who generally appraises in San Clemente can really understand Riverside…or visa versa?

2.  Since appraisers can no longer contract with their local bank and must now contract with the appraisal company, they have had to “expand” their areas in order to survive.  This leads to situations like the one mentioned above…with an individual appraiser assessing value on a property way outside the areas in which the he or she usually works.  This makes for easy misunderstandings on value…especially in an area like Riverside, where for the most part, we are not sectioned into tract after tract like Orange County, and our properties are much older (which does not mean worth less).  There is far more “interpretation” required in Riverside than in most other areas.

3.  After the appraiser is done with the valuation, many properties are then subject to a “review appraisal”…which is a fancy way of saying that someone else will review the value given by the first appraiser (another “safety” precaution to keep the banks and appraisers apart from each other).  What the public doesn’t know is that this “all-knowing” review appraiser rarely sees the property or surrounding neighborhood, but is instead sitting at a computer somewhere (several counties or states away) simply looking at numbers on a screen.  They have no personal knowledge or understanding of the area of the property, just data and pictures on a screen.  And guess what?  If they decide in their remote wisdom that the property value is too high, they issue a new value that everyone is stuck with…end of story.  Yes, there is an appeal process, but good luck with that.  So, in the end, someone who has never seen your home is deciding whether you can sell it for the value all the local people seem to feel it is worth.

4.  If the local appraiser gets his appraisal price “slashed” too often by the review appraiser, then it looks bad for the local appraiser and he is not given as many appraisals to do by the company.  In essence, the local appraiser learns very quickly to stay ultra conservative with the original appraisal so as not to get his hand slapped by the review appraiser.  Even if the local appraiser knows that the original value reflects the true value of the area, they can be reluctant to go out on any type of limb for fear of getting slapped and losing business.  Hey, they have families to feed too.  So…they continue with the conservative approach.

5.  The cost of appraisals has gone up for the borrower…by as much as $200-300.  Why?  Because there is now a middle man (the appraisal company created between the appraiser and the bank), and this company wants to get paid too.  In the old system, all the money for the appraisal went to the appraiser…now it goes to the appraisal company, and the company pays the appraiser…and many times the appraiser makes less now than before.  That’s why they take appraisal assignments farther away from their base areas…to make more money since they now make less per appraisal.  And naturally, this price increase is passed on to the borrower who is ordering the appraisal to get his new loan on the home.

6.  Lastly, understand that the appraiser is the only person in your entire transaction who gets paid whether the transaction closes or not.  Everyone else (the Realtors, title, lender, termite work company, escrow, seller) only gets paid when the sale closes.  This creates a huge difference between who is vested in closing your sale and who isn’t.  We actually had one appraiser tell an agent that they were more afraid of their review appraiser than they were of the transaction falling out (this said after the valuation was brought in over $50,000 below what 20 buyers had wanted to pay for the home)…and beside, they had already been paid, so what the heck?  This is a unique example and is in no way indicative of most honest appraisers, but it can happen…just like bad situations could happen the old way too.

The net result of all this is a severely changed appraisal industry that currently seems more interested in holding prices down than letting a free market work it’s magic.  We cannot tell you how many times we have a transaction in which a low appraisal blows it all out of the water.  Think about it.  The buyer, seller, Realtors and bank all want the transaction to happen…but the appraiser holds all the keys…both the local appraiser and the review appraiser.

It may not seem fair or right, but it’s what our government has mandated we deal with to “protect” us all.  This is not a political rant, but merely a statement of the facts, and why these facts keep our housing market from freely reacting to elemental supply and demand forces.  Maybe things will lighten up in the future…but for now, we must all play by the appraisers rules, or they will take their ball and go home…and no one gets to play at all.