A’Subjective Science’ For San Diego
The Voice of San Diego reports on appraisals. “The warm security blanket of San Diego’s booming housing market has been tugged away by negative trends across the board: a 25 to 30 percent decline in sales, a $10,000-plus drop in prices and an inventory level that has swollen to more than 200 percent of last year’s stock.”
“There’s another group feeling somewhat exposed these days, the appraisers who estimate property values for lenders. As professionals in the lending industry have begun to call for a return to integrity in lending, so have leaders in the appraisal community begun to reevaluate some of the practices that became commonplace in the boom.”
“Some appraisers say the boom provided a temptation to cut corners and complete more appraisals in less time. ‘In a hot, rising market, you can make mistakes and the market bails you out of it,’ said Roger Lopez, a real estate appraiser and the local chapter president for the Appraisal Institute.”
“Lopez explained that during the period of rapid home price escalation, even if an appraiser overestimated a home’s value, the market would reach, and usually surpass, that estimate within a few months. That meant appraisers..were sometimes tempted to save time by just looking at the comparable sales and delivering a quick appraisal based on those records.”
“But even when the market’s hot, Lopez said, ‘there’s still a right and a wrong way to do it.’”
“It can be tricky to arrive at a valuation in a cooling market. In San Diego’s cooling market, the sales prices of the comparable properties may not account for the price drops some neighborhoods have seen. And those selling the homes may be throwing in incentives like cash-back rebates or electronic extras, meaning the effective sale price of the home could be considerably less than the recorded selling price.”
“‘Appraisers that are taking secondhand data without any verification could be producing erroneous appraisals,’ Lopez said.”
“Jim Klinge, a Realtor in North County who’s been watching the market for more than 20 years, said a lot of people blame appraisers for pushing mortgage values high to accommodate the mortgage broker and the buyer. He doesn’t think they should shoulder all of the responsibility, though. ‘It bugs me that everyone wants to bash the appraisers,’ he said. ‘If the buyer’s willing to pay it, that’s the value of the home. The whole boom that we had was because the buyers wanted to pay the money.’”
“During the boom, once a highest bidder was determined, the lender for that bidder’s mortgage would send an appraiser to complete a valuation on the property. The appraiser’s job in that situation is to make sure the buyer isn’t paying dramatically more than the home is worth, so that the lender can avoid lending more money than necessary. Klinge said he thinks the appraisers usually lined their estimates up with where the market was trending, up.”
“‘It’s a subjective science,’ Klinge said. ‘You could have 10 different appraisers appraise the same house, and get 10 different estimates.’”
“Lopez agreed that the market is subject to substantial variability. ‘We only interpret the market, we don’t create it,’ Lopez said. ‘If five or six buyers are willing to buy a home at a certain price, that’s the market.’”
“Sara Schwarzentraub in La Mesa, holds the Appraisal Institute’s esteemed SRA, senior residential appraiser, title. She said the best appraisers are those who don’t change their practices depending on the market. ‘Honestly, we should be doing the same job,’ she said.”
“Schwarzentraub said the boom stirred in a significant group of people a desire to get in the appraising game. ‘Everyone told them they could make tons of money,’ she said. ‘In order to make a lot of money, you have to do a lot of appraisals. You’re tempted to rush. And a rising market will cover that.’”
“The number of active appraisal licensees in the state is 19,944, almost double the 11,070 licensees at the beginning of 2001, according to the California Office of Real Estate Appraisers in Sacramento. A slump could flush the out-of-work appraisers back into the local labor pool, where they could ostensibly be joined by out-of-work real estate agents, residential construction workers and mortgage brokers. The ramifications of that scenario could strain the local economy, as well as those of cities and states across the country as similar market conditions persist.”
“Greg Harding, OREA’s chief of licensing and enforcement, said two thousand licensees have been added to California’s ranks in the last year, he said. ‘Things were already looking poor back then,’ he said of May 2005. ‘I do expect a dramatic downfall in licensing if we do get into a housing slump.’”
“Harding said when the licensing program began in California in the early 1990s, the number of licensees reached almost 19,000, close to the current level. But the mid-’90s were ‘kind of a disaster,’ Harding said, when work slowed and the level dropped dramatically to fewer than 10,500. ‘It wouldn’t surprise me if that happened again,’ he said.”
I always find it the case that the “licensing” process seems to add very little value to the public. Just look at our roads. I think that whoever issues a license to an individual should have some kind of responsibility for their behavior.
When we were looking to have our house painted we didn’t look for a license, we looked for personal referrals and previous work.
Someone ought to sue the state of CA for licensing all those incompetent and dishonest appraisers. IF they can sue GM for car exhaust we can sue them for overpriced housing.
When licensing boards are composed of members of the same profession, the main function is to create a barrier to entry into the profession, to artificially increase prices. When funeral boards say you have to have a funeral director license to sell caskets, or cosmetology boards say you have to have a cosmetology license to braid hair, they’re not protecting the public from any genuine harm. (Both are examples of cases successfully fought by the Institute for Justice.)
what happened to the site ? i could not get on for 2 days. Thank god it is back can’t say so for the housing market
“There’s another group feeling somewhat exposed these days, the appraisers who estimate property values for lenders.”
Wonderin how they were holding up.
- a $10,000-plus drop in prices ….
Where in San Diego is there ONLY a 10K drop!!!??
Had a friend’s San Diego attached house just go into escrow for 470K. She originally listed it for 559 to 579K. The houses across the street last year sold for in the mid to high fives.
She’d thrilled to death she’s hopefully getting out alive. Closing is Oct 16 and I believe there won’t be a day that goes by that she doesn’t pray.
The old saying, “there are no atheists in foxholes”…there are no seller-atheists in escrow.
“Lopez agreed that the market is subject to substantial variability. ‘We only interpret the market, we don’t create it,’ Lopez said. ‘If five or six buyers are willing to buy a home at a certain price, that’s the market.’”
What if the home and all the other comparables within a 10 mile radius have all been sitting on the market for six months or more because all the sellers are in collective denial about the fact that market values have dropped through the floor, and meanwhile ever more homes are added to the for-sale inventory. How would the appraiser figure out the value in that case?
That’s a “normal” market, in which case, as David Lareah has told us, we add 6-7% per year. Soooo, you just take those 6 month old comps and add 3% and voila.
An appraiser looks for the most recent sales of similar properties. Properties that have actually closed not properties that are currently up for sale. The inventory of active listings also needs to be looked at to determine if there is an over supply in the market. If market conditions have changed since the date of the sales anaylzed then the appraiser may make a downward adjustment to those sales to reflect a declining market. Appraisals are not based on properties which have not yet closed. Only arm length transactions should be used and all sales must be verified by town land records.
“Appraisals are not based on properties which have not yet closed. Only arm length transactions should be used and all sales must be verified by town land records.”
This is a mistake — leaves valuable information on the table, IMO. Suppose inventories have gone up by 400% (PHX) — would you guess that maybe market values were lower than when there was a housing “shortage?”
I will tell you how a very good appraiser interprets the market. A townhouse entered escrow in late June for $555,000. Comparable sales for the similar models were in the high 540s to low 550s that had closed in the second quarter. However, there were several listings in July in the low 540s that had not sold and had lowered lising prices. Appraisal came in at $540,000. Here we are in September, and listings for similar unit are in the 520s. Location is in coastal Los Angeles County. Buyer of this unit got it at the very peak.
How would the appraiser figure out the value in that case?
Thru narrative and historical analysis, which of course requires education, competancy, the ability to write a cohesive paragraph, and the willingness of a client to reimburse you for your time.
Of course, all of these qualifications have been flushed down the shitter by appraisal management companies hired by the lenders.
How fast can you get it done and how cheap will you work are the only requirement for these sleazebag operations.
The public will suffer mightily for the failure of their state’s licensing and business regulatory divisions to have addressed this situation. And never believe for one instant that the azzholes running these departments didn’t know WTF was going on.
They all knew because the honest and ethical guys bein’ run out of business told them so.
Most were more interested in who was bringing in the morning’s Dunkin Donut collection than any sort of control and oversight.
“Greg Harding, OREA’s chief of licensing and enforcement, said two thousand licensees have been added to California’s ranks in the last year, he said. ‘Things were already looking poor back then,’ he said of May 2005. ‘I do expect a dramatic downfall in licensing if we do get into a housing slump.’”
No worries there — California real estate prices always go up, as does the number of California Realtors (TM) who can make a fortune by selling them.
“selling California homes.”
Ben,
so glad your site is back up–sent paypal donation as a thank you.
I sent a donation in too - I couldn’t believe how affected I was by the absence of the site. I had way too much free time for work-related stuff without Ben’s blog!
I have a feeling we will soon be seeing the return of the “review appraisal”. Back in the early 90’s, most lenders would order a review appraisal prior to closing, just to make sure the value hadn’t dropped too much since escrow opened. They were real deal breakers!
couple that with requisite 20% down payments again, and this market will be DOA.
Do you have a link on review appraisals?
The return of the 20% down payment will do more to slow this market than anything else. I *speculate* that lendors might even go back to the old 70’s down payment: 20% down *plus* the last 6 to 12 months appreciation. E.g., if homes go up 6% a year… expect a 26% down payment.
The national inventory on ziprealty just keeps climbing. 987,432 when I just looked. This isn’t the normal time of year to have growing inventory…
Neil
The return of the 20% down payment will do more to slow this market than anything else.
LMFAO…This will blow the theory of a house being worth what a person will pay for it out of the water.
With an entire 5 year value stucture built around zero down ARM’s and neg AM’s the proverbial shit is gonna hit with the implementation of a standard 20/80 loan ratio.
Any L/O I’ve spoken to in the last 10 years, says the borrower bringin’ this kinda money to closing table is about non-existent.
A property’s value is dependant on WHAT SOMEONE WILL LOAN on against it-and whatever the pay-back terms are gonna be.
Cash equivalency is DOA.
You can quit wishing for that, that will never happen.
Oops, you just hexed it - now it’s guaranteed to occur.
who exactly is going to make 20% second loans in a crashing market?
You want the short list or the long list.
Give me one name if you can.
Don’t be surprised if the government steps in and makes the 20% second loans. I believe desperate measures will be enacted by the Fed to (try to) keep the party going.
Just like they did in the 90s right?
HUD,VA,FHA,FANNIE MAE, Freddie Mac
Short list.
Already happened - e.g. Countrywide will no longer buy a loan without review appraisal. Who the ‘f’ wants to be held with a neg am loan in a falling market?
also, the appraiser should have to actually go into the property and evaluate the finish work, amenities, quality of materials, mechanicals (A/C, plumbing, heat, etc.), land quality, etc., etc.
The automated valuation models seem like they have a high potential for error.
As do human estimates. The fact that the buyer is willing to pay X has already established what the greatest fool is willing to pay. The question that the appraiser is supposedly hired to find out is: “What woud the second greatest fool pay?”
The automated valuation models seem like they have a high potential for error.
Good point, and right on the money, PENN…
These AVM’s have been the catz azz for lenders to circumvent flesh and blood appraiser’s during this cycle.
Chicken’s comin’ home to roost.
I have had concerns about this housing market for the past 3 years which resulted in my not buying. At one time, I was thinking of relocating to the San Francisco area, but my visit there two years ago convinced me that I could never own even with my being a professional. I have been saving studiously for the past year and half that would allow me to put 15 percent down on a dwelling. However, is it the right time to buy in Atlanta. Houses have not appreciated to the levels such as San Fran or the neighbor, Florida. I don’t want to lose money by buying today when I should have been a little more patient. Thanks to this blog I have put all my cash into CD’s. I too had withdrawals for the past two days.
I am not a local in Atlanta, but visit often as I have family there. I have been looking at the multi-family market since 1998, and rents were out of line with prices back then. Seems like renting is the best idea these days. If you find someone who really wants to sell, then the rent will be the same as the cost to buy (principle, interest, tax, insurance, HOA, plus maintenance), and you plan to stay there for 5-7 years, then buy. Let me know if you find anything!
I’d look at foreclosures; I read they are increasing in ATL
As I have said before ,if there are incentives in a deal the appraiser or underwriter is suppose to consider those incentives in the deal and how that reflects on the appraisal value being lower .
Would you like to tell me if the builders are disclosing the incentives as they are suppose to so the underwriter/appraisers can determine the true value .Mark my word , this is going to be a can of worms .
IMHO ,if you have 6 comps that show value ,I would agree that you have a market . If you have one comp you don’t have a market .
Everybody thought they could do no wrong because the market was going up . You would of thought the lenders/appraisers would of got a little hint that something was wrong when they saw 30/40/50% increases in 6 months to a year .What value did the seller add and why was the house so undervalued that it could go up so much so quickly as to exceed standard appreciation rates . Everybody closes their eyes during manias don’t they .
Wiz,
You are so right about that. It’s odd that they (lenders) aren’t already up in arms about this. In some cases, we are seeing incentives which are supposedly worth 20% of the asking price ($100K incentives on a $500K house). How in the world is this not being taken into account???
A market is created when a willing seller finds a ready and willing buyer. The appraiser and/or Realtor have no role in creating a market. These foolish buyers lined up at these properties out bidding each other and fighting over them. The demand out stripped the supply for years. All due to the Fed’s artifically low rates. The Fed and lenders are to blame for this train wreck.
If you have one comp you don’t have a market .
LMAO…Not according to Realtors. I can’t relate to you the number of times when a property value fails to meet the contract purchase price, when an indignant, outraged sales agent will drag in some weird, bizarre lone-ranger sale to a L/O demanding that the original appraisal be sacked and a new one drafted with reliance placed on this data.
And concessions?
WTF are those?
Most of the hacks in the appraisal biz today couldn’t even spell the word, or even know what it means, never mind apply an adjustment for the influence on the underlying value
Anybody notice our friend Jim the Realtor in that story? Good guy. I wish he’d post here more often. I enjoy his comments.
Jim the Realtor rocks. I read his San Diego blog all the time. I wish he was in Seattle. The guy has integrity.
What’s the URL to Jim the Realtor’s blog?
Just got this add in my email:
Set within Orange County’s charming Aliso Viejo, Canyon Villas is a magnificent condominium community flourishing with superb amenities. On October 14th, you will have a once in a lifetime opportunity to own your own home at Canyon Villas when 34 homes are offered for sale via auction with minimum bids of $295,000; a discount of up to 38 percent from the last asking price. Visit us today, tour the furnished model homes, and don’t miss this opportunity to own your own condominium home.
maybe he has some appraisers that he worked a little too closely with. if they go down for mis-leading appraisals, they might drag him down with them. when ever i hear the 20 year loc (line of crap) by brokers i lol. its one of there come ons, that i’ve heard inumerable times. “i’ve been in the business fo 20 years” so you can’t argue with me.
It’s unfounded comments like that is why I don’t like participating here
Jim, you’re the only realtor allowed to post on this blog and come out alive!
Jim,
please keep posting, I keep an eye out for your posts–i enjoy your blog and we need an honest realtor’s perspective.
Jim,
You know you’ve got my vote! Please keep posting here!
(Mrincomestream is also welcome to post here, especially since his recent conversion!)
thnk goodness blog is back up. was having some withdrawal feelings. lots of for sale signs in Ontario CA while I have been visiting here. I see some further BIG DROPS for the entire IE.
an appraisal is an reasonably supported opinion of value.opinion.lenders have only been willing to pay for “drive by ” appraisals for the last few years.3 comps,drive by,yup,there is a building…3 pix,write her up. as far as orea,you have to have taken and passed a 45 hour appraisal class,taken and passed a 15 hour “uniform standards of appraisal “class and test,passed a 4 hour state test (it takes one hour if you have decent reading skills)then passed a state and federal criminal background check.at which point you are a trainee and need 2000 hours of “supervised” appraising to get a basic license and go out on your own…if you can find an appraiser to take you on,you will be lucky to make $15 an hour the first year.
“Some appraisers say the boom provided a temptation to cut corners and complete more appraisals in less time. ‘In a hot, rising market, you can make mistakes and the market bails you out of it,’ said Roger Lopez, a real estate appraiser”
He MEANT to say:
‘In a hot, rising market, you can commit fraud and the market bails you out of it,’
“‘It’s a subjective science,’ Klinge said. ‘You could have 10 different appraisers appraise the same house, and get 10 different estimates.’”
What he MEANT to say:
“You could have 10 different appraisers appraise the same house, and get 10 different estimates, which made it MUCH easier to shop the appraisal, and get the exact numbers you needed to close the deal.”
“‘It’s a subjective science,’ Klinge said. ‘You could have 10 different appraisers appraise the same house, and get 10 different estimates.’”
Total BS…
It’s very obvious this moron has never taken the Appraisal Institute’s 101 and 102 courses on real property appraisal.
What his comment is meant to do is obviate the fact that hordes of incompetant, inept, and easily coerced people were put out on the street by state licensing mills.
Relocation companies demand a 4% correlate value spread on the appraisals prepared for properties they may be purchasing.
You miss this number on repeated assignments and your RELO certification will be revoked.
However, unlike work done for the GSE’s industry who could give at rat’s azz on competency because some wholesale sucker is the one who will be stuck, the relocation companies have a real interest in accuracy as they must answer to a transfered client’s finance officer in the event of a major loss on resale.
So, screw you, Kluge, And WTF qualifies you as a Realtor to be commenting on the science of appraising.
Given the nature of your comment you’ve obviously been an integral part in the coercion and black-mailing of appraiser by the assumption that all are easly maleable in the rendition of value reporting with the presumption of inherant report subjectivity.
A slump could flush the out-of-work appraisers back into the local labor pool, where they could ostensibly be joined by out-of-work real estate agents, residential construction workers and mortgage brokers. The ramifications of that scenario could strain the local economy, as well as those of cities and states across the country as similar market conditions persist.”
What do you mean “could”
With the demise of the refinance sector, the demand for appraiser’s collapsed.
There are literally thousands who are starving to death right now, with their licenses worth jack-squat.
Nothing more than outright fraud perpetrated by the state licensing boards.
I was going to pan this Jim guy but then I relialized it was the same Jim guy that everyone was saying had a good SD RE blog.
The problem with this whole appraisal thing is that there is a conflict of interest in the biz relationship. Appraisers know that if they don’t play ball, they won’t get more work. He who pays the piper calls the tune. You can go on and on about “the good ones” but the system is busted, and the payers know exactly what they’re doing, it wasn’t a mistake.
In the past, when bank held mortgages, it made sense to want an honest opinion on the value of the colateral. It made no sense to push someone to fudge the value because later, you might get stuck with a non performing loan and colateral with less value than the debt.
But today its a whole new ball game, the mortages are sold off to someone else (via GSE’s: Fannie, Freddie). The appraisal is just a check box (yup got that). The bank gets its fee, and the tax payers (via the GSE’s) get to back a bogus loan. The GSE’s (AKA tax payers) insure the mortgages for the mortage backed securities they sell off, and for the ones they keep for themselves (>$1 trillion) they of course are assumming the entire risk.
So in actuality, we, the people, are underwriting our own asset bubble.