Wednesday, April 06, 2005

"Appraisal Inflation": How Long Has This Gone On?

Many of the Demos reports and other posts here have called attention to the pressure appraisers have been under to support the wild increases in home prices. Now that CNBC has addressed the problem, has the practice come under the spotlight?

"Appraisers say there is pressure on them to inflate home values, and there is concern that if people pay too much for their homes it could lead to more foreclosures if housing prices tumble."

"A recent survey of 500 appraisers found that 55 percent of them personally feel pressured by sellers, agents, and even lenders to inflate home values by 10 percent. And one-third of the appraisers surveyed said they fear losing business if they don’t comply."

"Jonathan Miller, CEO of an appraisal company in Manhattan, said he thinks 75 percent of appraisals are inflated. 'The people who are paid on commission probably won’t be there when those problems come in the future.'" Thanks to the reader for the link!


At 9:11 PM, Blogger John Law said...

There was a really long article in the NYTimes about this happening to lower-middle class people in the Poconos...I think I deleted it though. it's a shame how it crushed people's dreams.

At 11:20 PM, Blogger Mr. Naybob said...


In a previous career life, I was in the loan origination and servicing business. I spent years working for two top prime lending institutions, dealing with mortgage brokers, bankers and underwriting 1st TD's.

I can tell you unequivocally, this has been going on for years and everyone is in on it, title, escrow, realtors, appraisers and the lenders. No conspiracy necessary, its called greed.

The Nattering Naybob

At 7:03 AM, Blogger deb said...

I was a realtor in LA in the 90's. Yes, the realtors always pressured the appraiser to bring the appraisal in at the sales price. However, the lenders were very cautious. Under-appraisals were very common, then, buyer and seller would have to renegotiate. If the escrow was longer (60-90 days) the lender would do a review appraisal right before it closed just to make sure the value hadn't dropped too much since escrow opened. That was a real deal breaker.

It seems to me the thing that is different now, is that the lenders themselves have no concern for the value in the property. The realtors eagerness to close used to be balanced by the lender's lack of willingness to take a risk. I'm sure this situation has been worsened by the GSE's, etc. Nobody worries because the loan goes into some nameless faceless pool of loans, sold off to "investors".

Also, the appraisers used to have a sense that their neck was on the line if they brought it in too high. The property could be worth much less than the appraisal within months. It seems some appraisers are starting to worry again. Good for them!

At 7:36 AM, Anonymous Anonymous said...

It is time to sell according to

Biggest Net Sellers Of Property

Interesting WSJ piece today on the private local real-estate investors -- the "smart money."

Guess what? They were the biggest net sellers of property in 2004:

"The rule of thumb for tourists is to always eat where the locals eat. If the same holds true for real estate, investors should consider selling.

Private local real-estate investors as a group were the biggest net sellers of property last year, selling off about $4.5 billion more than they purchased, according to Real Capital Analytics Inc., a New York real-estate research firm. Their aggressive selling spree began about a year ago, shortly after interest rates began rising last April, and continues today.

Some of these sellers are reinvesting the proceeds of their sales into development or redevelopment projects or in markets where competition for properties is less fierce. Others are holding off on reinvesting money in real estate or are deciding to simply pay the capital-gains taxes on their property sales.

Real Capital President Robert White Jr. says he can tell whether a market has gotten overheated by paying attention to these investors. "They're not motivated by fees or allocations and they're very entrepreneurial," he says. "They have total freedom to invest across property types and markets and traditionally have led the market."

Again, I feel compelled to point out the difference between a full blown bubble and an extended asset class.

At 7:45 AM, Blogger Ben Jones said...

(this has been going on for years and everyone is in on it)

A dirty secret indeed. Now we'll find out what the result is..

(the lenders themselves have no concern for the value in the property)

That does seem to be what changed. The appraisers have been complaining for some time; nobody listened.

Thx John, Naybob, Deb..Ben

At 7:52 AM, Anonymous Anonymous said...

Sales drop in Toronto:

At 8:15 AM, Blogger John Law said...

CNBC has a RE townhall meeting tonight at 8 and 11 EST

At 10:26 AM, Blogger Ben Jones said...

(Sales drop in Toronto)
Great tip, very helpful.

Maybe you could let us know what happens at the townhall. I would but I don't watch much TV and don't get CNBC.


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