It's a tale of two markets; distress home sales versus normalized sales, that is creating appraisal pricing issues in many markets across the U.S. today.
According to a recent nationwide survey conducted by the National Association of Home Builders (NAHB), one out of three builders are reporting losing signed sales contracts during the preceding six months because appraisals on their homes are less than the contract sales price.
"The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices, killing home sales, causing more workers to lose their jobs and delaying a housing and economic recovery," said NAHB Chairman Bob Nielsen.
Too often, due to faulty appraisal practices, brand new homes with sparkling appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair. The result, in many cases has been that the new house winds up getting appraised at less than the cost of construction.
That is precisely what is occurring in today's marketplace, according to the NAHB survey, where a full 60 percent of respondents reported they were experiencing appraisals coming in below their contract sales price.
Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home.
"This is not only unfair and unreasonable, but it perpetuates the cycle of declining home values, drives more home owners underwater, harms local economic activity and acts as an obstacle to the recovery of the housing market," said Nielsen.
These appraisal practices are a major contributing factor to the current acquisition, development and construction (AD&C) lending crisis that has choked off credit for home builders and threatens to prolong the current housing downturn.
Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans.
Since Sept. 2009, NAHB has held four appraisal summits in Washington with representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others to find solutions that will allow appraisers to develop realistic valuations based on sales that are truly comparable.
The need to give top priority to addressing the complexity of property valuations in distressed markets and impediments to the flow of appropriate information on homes between appraisers and interested parties was discussed during the most recent summit, which occurred on Oct. 19.
"Major reforms in appraisal practices and oversight are needed to ensure that appraisals accurately reflect true market values and don't contribute to price volatility or harm aspiring home owners and move-up buyers," said Nielsen. "We will continue to work with all stakeholders in this debate to find solutions."
With the decline in home prices appearing to have ended or be coming to an end in most parts of the country, resolving the appraisal and credit crunch issues remain a top priority for the association.
NAHB's latest Improving Markets Index has shown modest signs of improvement in scattered housing markets where employment is gaining and distressed properties are not as numerous.
New-home construction stands ready to serve as an engine for economic recovery. Building 100 single-family homes creates more than 300 full-time jobs and provides $8.9 million in federal, state and local tax revenues.
"Resolving inappropriate appraisal practices and restoring the flow of credit to home builders will not only help to put America back to work, it will provide badly needed tax revenues that is essential for local governments to support schools, police and firefighters in communities across the land," said Nielsen.