DISQUS

MinnItMan · 10 months ago

Near as I can tell, your math is fine. A variation on this was the Alt-A 100% investor purchase mortgage that allowed the seller to pay a 3-6% concession to the buyer for closing costs. Assuming a 5% push on the appraisal for a $200K purchase and that the retreating market started earlier than is generally recognized (say the middle of 2005), then you have 2 years of deals where buyers were upside down the minute they left the closing by $16-22K.

The part I can't figure out (with any real precision) is the cumulative effect of using comps that are pushed, and then pushing even more. Transactional velocity (growing numbers of purchases and refis) created nearly all the appreciation, not ordinary supply and demand.

morganb · 10 months ago

"The part I can't figure out (with any real precision) is the cumulative effect of using comps that are pushed, and then pushing even more. Transactional velocity (growing numbers of purchases and refis) created nearly all the appreciation, not ordinary supply and demand."

This is what I'm wondering too. Great comment. Was it all just related to churn, or real demand? I'll hunt around to see if there are some opinions on it.

cpruitt · 10 months ago

This was part of the problem, but the primary inflationary pressure came from too much easy credit. An appraisal is supposed to support what a willing buyer would pay for the property. The law of supply and demand determines values. The artificial demand for housing created by people who shouldn't have been in the housing market in the first place but were there nonetheless created enough demand that the prices were really being pushed up from an appraisers viewpoint.

That being said. I think there it is a fundamental systemic flaw to have both originators and appraisers essentially working on commission. (Not technically in the appraisers case, but effectively. Due to the pressures you cite in the post.) I don't think it will be a very long time before those two groups are working on salary only.

morganb · 10 months ago

I agree completely. I don't think that it was the primary problem, but definitely an important factor. I also agree with your assessment of the compensation structure of the model as it exists currently.

len · 10 months ago

Humans are social animals. Herding or following the crowd is good for survival. If you walk alone into the wilderness, you often get a sense of vulnerability – yet, if you were in the wilderness with a group of people, you would feel invincible.
Copying the actions of others is much easier… remember the high-tech stocks? I know I started to feel the pressure to invest in companies with no real product, assets and earning history. (Luckily I didn’t)

I suggest that we have not had very many “normal” real estate markets in the past 20 years. When housing was appreciating and banks made it easy to obtain a loan; the human herd jumped aboard which perpetuates the appreciation. Now that housing is declining, the human herd is jumping ship, yet interest rates are still very low and there is an abundance of available housing. We have reached a point in the real estate market that foreclosure is now acceptable to the human herd.
Now look at our “normal” markets… do you remember any of them? They were very brief in my market area. Home prices were not increasing or declining… there was a perfect number of homes on the market and available to potential buyers… Sellers didn’t need to offer major concessions or drop their list price. Buyers had time to shop and compare homes without the pressure of time - to quote Goldilocks "not too hot, not too cold, but just right."

Tobby · 10 months ago

This is very old (mostly) news. The appraisal process today is tight as a drum. And while there are plenty of exceptions, a 2005 FNMA white paper showed that appraised values were in fact lagging the rapidly rising market. The most likely cause being that new contracts for sale were always higher than the available compable properties.

Sham appraisals have always existed, and he market held steady. However, cheap and easy credit, the real culprit in the housing bubble, has never existed for so long in our economic history.

morganb · 10 months ago

Tobby,

Yeah, wasn't meant as a news piece, just as a reflection looking back on the industry. I'm actually getting to meet Robert Shiller (of Case-Shiller fame) today so I'm going to ask him about the index and the effect of pushed appraisals in home value declines.

Fielding Mellish · 10 months ago

Fannie & Freddie helped create the problem of "pushed" appraisals. When they started charging 1/2 point (6-7 years ago) for a 71% loan-to-value "cash-out" refinance, and at the same time defined "cash-out" as a loan paying off any 2nd mortgage (even if it was "seasoned" for 29 years) that hadn't been used to purchase the property, they created an incentive to game the systme. I think they started charging that 1/2 point on 71% LTV cash-out refi's in part because they assumed that appraisals were bogus and that a purported 70 LTV might well really be an 80 LTV. Nevertheless, the fact that they started charging 1/2 pt for 71 LTV c/o refi's incented loanofficers to ask appraisers to push the appraisal a tad bit. Fannie's greed demanded it. Fannie & Freddie simply didn't deserve to get a $1,050 delivery fee on a $210,000 loan just because the appraisal came in at $299,000 instead of $300,000. The fact is that Fannie & Freddie got greedy with their delivery fees, creating a perverse incentive to push appraisals.

CRay · 10 months ago

>>>The appraisal process today is tight as a drum.<<<

Really..? .. maybe if you live in Tibet....

One of the major reasons for the market collapse, is *because* of the phony appraisals...

How many agent/realtors used "their" appraiser of their "A" list..? .. 1 out of 2000.? 1 out 1,500.? .. maybe 1 out 500.? ... how about 50%++..

Realtors are in a commission driven business, they want their deals to travel the quickest way from point A to point B ....

Do you think they're going to use an appraiser that is usually dead on the money, or .. are they going to use an appraiser they know will miss a bad roof tile from here to there and not be afraid boot an appraisal an extra $10/$30/$50,000.? --- it's *not* rare ---- it's Common.

You can't really use a comp unless you've seen it, walked it and felt it ... anything else, is just paper-mâché ..

I've been buying and selling real estate for over 30 years in 5 states .. If I was buying a piece of property, I always used my own appraiser - as always, it always seemed to be the one the one agents despised the most.

The appraisal business (as well as the Real Estate business) should have come under scrutiny and changed 20 years ago ....

Realtors telling potential buyers there is offers when they haven't seen one in 100 days is a farce, or.. the offers they have received, are by consumers that couldn't buy steam off a hotdog - another reason why home values are so distorted ... "buyers agents" telling consumers the house has only been on the market for 9 days, when it's actually been on the market 209 days (because it's been re-listed with it's 3rd realtor and they've lied about it's "actual" DOM) is not only a farce, but should be a Criminal Offense (and handled in that fashion) - how many folks paid $385,000 for a home yesterday that was listed 5 months ago for $345,000.? -- again, another major reason why home values are so distorted...

Changing the "system" would be the quickest and the cleanest way, it would save the market billions ... anyone with $200 and 30 hours of time on a computer can get a real estate license (depending on the state) it's not much different for appraisers ... make it a college class with actual requirements and limitations and a degree, and you won't get a repeat of: 1999 - 500,000 agents ... 2008 - 1,800,000 agents, and all of them looking for that next commission, the same for appraisers.


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