Low home appraisals hold down area values

Even as buyer confidence climbs, the local housing market still faces a tough reality: Appraisals are falling short of what many buyers are willing to pay.

It's a problem that is weighing down home prices and stalling a more robust recovery, Twin Cities agents say. And they find that surprising in a market where inventory is scant and multiple bids on homes are becoming more common.

"People don't realize that it's getting better and don't realize that what we have could be even better," said Marti Estey, a sales agent with Re/Max Results, who has had several deals nearly fall through.

The National Association of Realtors reports that more than one-third of agents surveyed during April said that a low appraisal led to either a cancellation, lower price or delay in the sale of a home during the previous three months.

Eric Humphrey knows these frustrations well. A low appraisal nearly killed a sale on his house in St. Paul's Mac-Groveland neighborhood this spring.

Because the home is in an area where the market has been particularly strong, he wasn't surprised when he got a full-price offer not long after his house went on the market. Then the appraisal came in $5,000 short.

"Who sets the price, the market or the appraiser?" he asked. "Isn't something worth what someone is willing to pay for it?"

But appraisers say their hands are tied. Rules issued in the wake of the housing crisis have put appraisal work under closer scrutiny from lenders. Not only do appraisals require more documentation, there are also fewer comparable sales to support higher prices. Foreclosures have made the process even tougher because appraisers must take into account that the comparable was a distressed sale.

"Appraisers are under great pressure," said Alan Hummel, chief appraiser with Forsythe Appraisals in St. Paul. "If they can't support an adjustment or a value, they're certainly not stretching."

And the appraisal process itself has changed. In late 2008, Fannie Mae and Freddie Mac rolled out its Home Valuation Code of Conduct, intended to make the appraisals more independent. Lenders and agents used to be directly involved in picking appraisers, but now they must request one through a third-party company. Appraisers are typically required to find four to six comparable sales that have closed during the past several months. Based on those comps, if the final appraisal is below the agreed-upon price, the lender can reject the transaction. That forces the seller to either lower the price or the parties must come to an agreement on who will pay the difference.

Estey, for example, recently had a buyer who was willing to pay $385,000 for a house listed at $379,900. The sellers accepted that offer, but the appraisal came in at $10,000 below. The deal closed only because both sides split the difference with a recorded price of about $374,950.

Estey and other agents say that when home prices were on the decline it was no surprise when an appraisal fell short, but they say the fundamentals have changed. Closed sales have increased by double digits for several months, mortgage rates are at record lows and in some areas demand outstrips supply, which has spurred competing offers on some homes.

Hummel contends that appraisers are simply responding to changes in the underwriting process, which requires more documentation.

"We have a responsibility to really accurately measure the market, and appraisals should not be high or low -- they should mimic the market," he said.

And with several years of price declines, he said a turnaround in prices isn't going to happen quickly.

"It's always tough in a rebounding market for an appraiser who is using historical sales to help the lender know today what the value of that property is," Hummel said.

Jonathan Smoke, executive director of Hanley Wood Market Intelligence in Washington, D.C., said the effects of the housing bust are driving much of the caution.

"Given the importance of a stable home finance environment to our economy, no one should blame appraisers for being conservative."