“If they said it, it must be true.”

Saturday, April 20, 2013

CNN Money recently published a piece (located here) titled “Home appraisals no longer derailing sales”, a quote generically attributed to members of the National Association of Realtors (NAR). What struck me as a bit odd was the fact that just about a year ago, the NAR in conjunction with the National Association of Home Builders (NAHB) stated in another article on home sales and appraisals that roughly 1/3 of the deals placed into contract by its realtor members were failing to close due to problems getting appraisers to recognize the market had recovered and values were increasing. The NAHB was quoted as saying essentially the same thing except it was the refusal of appraisers to recognize the true value of a new home which was causing 1/3 of new home sales to suffer the same fate.

So, it seems these behemoths of the real estate industry have had a sudden change of heart and now love appraisers…or do they? Elsewhere in the article you find statements like the one from a realtor who has closed 15 sales this year and said “none of the appraisals have come in below the selling price”. You may ask, what’s wrong with that? Well, I think the odds 15 sales in a still frothy market have a selling price equal to or less than the final appraised value are pretty high – kind of like the odds the Chargers will win the Super Bowl. Instead, what I think is happening is just a new tactic by the NAR and NAHB to get appraisers to “play ball”. Last year they accused appraisers of single-handedly keeping the market from recovering and this year they are patting appraisers on the back and saying how happy they are that appraisers recognize the market has recovered…but has it really recovered? Or is this just a classic case of reverse psychology designed to make appraisers everywhere join hands with realtors and builders to sing songs of joy around the campfire?

Like any economic prognosticator if you repeat your prediction of peace and prosperity long enough, the odds are you will someday be right. I think the NAR and the NAHB have unilaterally declared the real estate crisis to be over and they want this pronouncement to be so convincing that everyone else around will nod yes and say they are right. I don’t believe any such statements are malicious or even intentionally misleading, but neither do I see any hard evidence of a fundamentally sound recovery in the housing market. The market still seems to be dominated by cash buyers hoping to flip homes within a few months at an even higher price. I know you have heard home prices are going up everywhere, but there is a simple reason for prices increasing and it’s a reason even the NAR and NAHB acknowledge…there are more buyers than sellers.

Anyone who took Econ 101 and managed to stay awake for even half of the lecture classes heard all about the laws of supply and demand, but interestingly these laws make no mention of true or fair value. In other words, if there are more buyers than sellers, the buyer who must buy now will be willing to pay more than even the asking price for a home if there are enough other bidders to create the perception (or reality) that it will take an offer above listing price to get the home they want. The problem is this situation is a classic example of how a bubble in prices happens. When ten people want the one house available, an auction develops and the next thing you know is someone bought the house for more than its true or fair value. This happens when people pay more than it would take to build a new house on the lot next door and this, my friends is how a bubble starts. Now, stop and ask yourself what this house will be worth a year from now when the homebuilders who own 30 lots less than a mile away start building spec homes again and there are now three homes for every buyer instead of ten buyers for every home. I don’t gamble much, but if this scenario developed I’d be willing to bet a pretty sizeable sum of money the resale value of this home would be severely impacted by the new homes being built less than a mile away and being sold for $50,000 less than what the buyer paid today in the auction environment which now exists.

Of course if this happens, it will be the appraisers fault for valuing the property for what it sold for and not for what it was truly worth, but at least the NAR and NAHB will be happy because the market recovered just like they said it would…over and over and over.

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Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.

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