Are
We Worried Yet?
November 29, 2000
By
all accounts, the residential refinancing frenzy is now history. The
residential market appears at the very least appears to be pausing from
the superheated pace of the past several years.
Demand
appears to be strong: prices continue on an upward trend, and there are
low inventories right now. Most statistics point to an inversion where
prices continue to increase while the actual number of sales decrease.
Does this point to a satiation of market demand or to further price hikes?
Do buyers at some point say enough is enough? Coupled with a cooling
economy, a decrease in confidence, and a new administration, is this a
danger signal?
A
trend that may become more apparent is that buyer concerns with property
quality and condition is returning. This more measured view may replace
the "race for space" among buyers that has prevailed.
Interestingly, "good" properties (define: good quality,
condition, location) are bid after strongly. A lot of properties
reportedly don't come to market because sellers have unrealistic
expectations.
What
about pressure on appraisers? What about overvaluations that are a result
of pressure? The problem is one that is virtually invisible in a strong
economy where housing prices are steadily rising. What happens when the
cycle ends and the housing economy softens?
The
press has been quick to blame the appraisal industry. Residential
appraisal clients tend to be overwhelmingly lenders. Thus, appraisers are
under enormous everyday pressure to please their clients. For lenders,
this usually means coming up with values that allow a loan transaction to
proceed. This means that appraisers often expend enormous energy in coming
up with values to meet loan requirements that may or may not stand up to
scrutiny after the fact.
Some
industry groups have used this propensity by appraisers to "hit the
numbers" to cast aspersions on appraisers' intergrity and to further
discredit the appraisal industry. Unbelievably, many of these critics are
the same ones that push appraisers to make the deals go.
Thus,
The role of the appraiser is under continuing attack with "stripped
down" appraisals becoming more and more the norm. Computerized (AVMs)
valuations are becoming more prevalent. A lot of work that appraisers used
to get stays "inhouse" or gets farmed out to various
"appraisal-like" firms.
These
admirable trends, which benefit from better technology and availability
information, would, under different circumstances, be handled by
appraisers. But appraisers have been slow to react to these changes and
have been somewhat swept aside by the twin towers of technology and
business need.
Appraisers
who are able to say no to demand to inflate values or overlook detrimental
conditions run the risk of losing clients. Those appraisers who meet
demands gain in the short term but will only lose in the long term.
Are
markets now efficient enough so that we no longer care what the
"real" value is? Or, is the population at interest deluding
itself until the next fall.
Does
history provide a guide? It may. Looking at the S&L crisis, some clues
emerge from the disastrous residential real estate markets in the oil
states (Texas, Oklahoma) and the west coast. Homeowners with low equity
loans on overpaid homes who lost a source of income created much lender
fallout.
The
trends of overpriced (and overvalued) real estate, less and less equity,
and continued pressure from the residential debt investor market for
saleable product merge into a potentially unpleasant surprise. As we
learned the last time around, hindsight is a great teacher. To paraphrase
a wise person's observation about last time, the window of opportunity
does not close gradually: we don't know that the window closed behind us
until we can't get back in.
Appraisers
are licensed now: this wasn't true before. When market changes become a
consumer issue, a lot of scrutiny will come down onto appraisers. It may
not be much fun.
Up
markets don't last forever; conventional wisdom says there's no way to
time market ups and downs. So, are we worried yet? Should we be worried?
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