Thanks for the video link. The appraisers have been low balling values in an effort to remove some of the erroneous value from the system that they created during the boom. The average house values are about $30K higher than the average that leading economists say an economically sustainable housing industry can support. We already have spec builders going right back to the same behavior as before which will ultimately crash the system again. It's just a matter of time.
The woman in the interview touches on the problem. The majority of houses, which happen to be the cheapest, are being overvalued while those of higher quality are being undervalued. To say the appraisers are simply averaging values of the recent sales in the area is an oversimplification of how the system is SUPPOSED to work, but the values always end up somewhere in the middle. Appraisers are not supposed to be using foreclosures and short sales as comparable properties, but one of the leading forms of appraisal fraud or erroneous appraisals comes from using "bad" comps. When using the most popular and easiest approaches to appraisals, the Sales Comparison Approach, you put junk in one end and worse junk comes out the back end. When the volume of appraisals increases so does the escalation of value for the cheapest made, mass produced spec houses, which drive the values in their areas.
This woman is talking about appraisals coming low, which is a problem for the nice house, but what we need to fear is when the spec houses start gaining value too fast because the lower your sales price, the more room you have to be pulled UP toward the middle and these are the houses being mass produced in the highest quantities. These are the houses gaining the most erroneous value the quickest. It was the spec houses that are most to blame for property values skyrocketing out of control and this was the root cause of the crisis.
The best way to put the breaks on the over valuing of the mass produced spec houses is to force them to use their own sales as comps rather than allowing them to use a more successful competitor's sales to justify a value that exceeds their own sales history. If they want a higher appraisal, then build a better, more desirable house. This is like valuing a Honda based on what the Mercedes sold for and visa versa. How can Mercedes stay in business if they are judged by the sales of a Honda? How can these builders argue that they should get better appraisals than their sales histories indicate? There is an expectation in the industry to have your cake and eat it too.
Yet another shameless plug, come see me talk about this subject at the Reinvention Symposium in Chicago on 10/19. We hope to see you there!
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Eric Rawlings AIA
Owner
Rawlings Design, Inc.
Decatur GA
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