Home sales in Middle Tennessee continue trending upward, but industry experts say appraisals are slowing the rate of improvement.
(TMP File Photo)
Nearly 50 more homes were sold in Rutherford County last month than in January, according to home sales data released by the Multiple Listing Service. A year-over-year comparison for February home sales was slightly higher with 290 total sales in February 2013, compared to 222 in February 2012 – a whopping 31 percent increase.
Nearby, Williamson, Davidson and Wilson counties saw similar growth. A total of 227 homes were sold in Williamson County in February – a 20 percent jump from 189 in February last year. Davidson County saw 478 homes sold last month, which is 16 percent greater than the 413 in February 2012.
While Wilson County lagged behind the other counties in overall sales – only 118 last month – it still showed a 9-percent growth from 107 the same time last year.
Overall, February was 12 percent higher than January, but Red Realty President Steven Dotson says the increase is to be expected as spring quickly approaches.
“The month-to-month numbers will jump around, so we try to watch the same month from previous years instead of month-to-month seasonal changes,” he says. “So far this year, we are 19 percent higher than 2012, which was higher than 2011, so the trend is definitely showing improvements. We will soon have an inventory problem and shortage of quality properties for sale if the trend continues.”
But Dotson said he is convinced sales could be improving at a faster rate if appraisals were more in line with the current market.
Before a sale can close, the buyer and seller must agree on a price, of course, but that’s not the end of the story.
A mortgage broker must contact an appraiser to determine the value of the home. That appraiser may know the area, comparable homes, and local information that should be used to determine the value.
Or, the appraiser is completely unfamiliar with the area and, therefore, cannot consider contributing factors, he said.
The final appraisal is then used for the mortgage given to the buyer, and if it’s low, the contract is renegotiated or canceled.
“To the appraisers’ defense, they have to use comps from the last six months, and they can’t see what’s going on today,” Dotson explains.
“Everything that is selling today may not close for 30-60 days, and (appraisers) are using comps from six months ago when we had more foreclosures and short sales. But if they were allowed to talk to Realtors to realize the inventory is low and that the home they are appraising had four full price offers on it, we wouldn’t have as many under appraisals. In a quickly-changing market, appraisers should be able to use today’s information, not four-to-six months ago’s old news.”
The National Association of Realtors released survey results in October 2012 with similar findings.
“Most appraisers are competent and provide good valuations that are compliant with the Uniform Standards of Professional Appraisal Practice,” the report states. “However, appraisals generally lag market conditions and some changes to the appraisal process have been causing problems in recent years, including the use of out-of-area valuators without local expertise or full access to local data, inappropriate comparisons, and excessive lender demands. In addition, before the beginning of (2011), some lenders’ loan processors edited valuations, cutting them by a certain percentage.”
While 65 percent of Realtors surveyed in September report no contract problems relating to home appraisals in the third quarter, 11 percent said a contract was cancelled because an appraised value came in below the price negotiated between the buyer and seller, 9 percent reported a contract was delayed, and 15 percent said a contract was renegotiated to a lower sales price as a result of a low valuation. These findings are notable given that homes in many areas are selling for less than replacement construction costs.
Lawrence Yun, NAR chief economist, said there has been a steady level of appraisal issues for quite some time.
“Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion, and in some cases are preventing them from buying at all,” he said.
Rutherford County’s Dotson says he doesn’t blame the appraisers themselves, rather the strained process put on the appraisal system by government regulators.
“When the mortgage crisis caused the economy to go into a recession, the mortgage banks were the reason/blame for the collapse,” he says. “So the government changed all the rules/regulations on mortgage banks, which they should have done since many were recklessly selling mortgages to investors that were sold as ‘good’ loans when they weren’t.”
The problem, he says, is the government went too far by setting up new regulations to control the appraisers and keep them from over-appraising properties.
“I don’t think the appraisals were the problem,” Dotson continues. “A property is worth what a willing or able buyer is willing to pay for it based on supply and demand. The problem was the Wall Street brokers selling bundles of mortgages as ‘good’ knowing that they were given to bad credit homeowners. So the government went too far making the relationship between banks and appraisers very difficult to manage.”
The process also requires banks to use an appraiser rotation system to ensure fairness.
“Prices should be determined by the free market’s supply and demand not a government-regulated appraisal system that is flawed,” Dotson said.
NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said some appraisal practices lack common sense.
“Our long-standing policy is that all appraisals should be done by licensed or certified professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend, but clearly this isn’t practiced universally,” he said.
According to the NAR report, the appraisal industry has made strides in adapting to market conditions, expanding education and making appropriate adjustments for distressed homes that are used as comps.
Fortunately, the level of distressed sales is trending down, and by 2013 NAR expects the distressed market share to decline to about 10 to 15 percent. As distressed inventory is cleared from the market over the next two years, it should help to correct ongoing problems.
“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” Veissi said. “In some cases, a second appraisal may be justified.”