Real Estate

Proceeding with caution

Appraisers appear tentative over housing recovery

A recent survey of appraisers conducted by United States Appraisals found that appraisers are still very cautiously optimistic of the state of the housing market. Despite national headlines and statistics showing more certainty, appraisers remain unmoved. Why?

In April we sent a brief survey to everyone on our panel and tallied the results. We repeated the survey at the end of the second quarter to measure any changes. United States Appraisals, like many appraisal management companies, works on a national level. We have a panel consisting of individual appraisers residing in nearly all counties of all 50 states. That provides a big pool of local individual opinions that we thought would be interesting to poll.

We all know that the real estate market is a zip code driven business. Appraisers tend to focus on the local markets in which they work and are not typically concerned with national numbers or reporting. They provide a good gauge and a grounded opinion of the status of housing in their local market. By polling our nationwide panel of local appraisers, we believe that in the aggregate we receive a solid interpretation of the national marketplace. After the last few years, a mildly strong level of confidence shows some definite improvement in appraiser attitudes.

The two primary questions were: What is your level of confidence in the current housing market? And how are home values trending in your area?

The rating average on the survey was 4.58, so mildly strong overall (see graphs). This was just slightly higher than the 4.54 average score on the first quarter survey. Despite the slight overall improvement, we did see a move toward neutral as only 24.8% provided a neutral response to the first-quarter survey. Clearly, the majority of appraisers are seeing home appreciation in their markets, with 71% reporting some degree of appreciation. The overall rating average was 4.98 vs. 4.74 on the first quarter.

Appraisers are seeing home values increasing – and some markets are very strong. So why the tepid view of the overall housing market?

Appraisers, typically, are realistic and base their opinions on data. But the response on home values would seem to indicate there would be a corresponding stronger view of the market. I believe the overriding reason is “caution.” When the housing bubble burst, order volumes plummeted and appraisers certainly felt the bite of smaller paychecks. Many left the industry altogether. To prevent another bubble, regulations were implemented that created the need for appraisals to be ordered by those not involved in the loan production.

Many financial institutions separated duties and continued to order internally but the explosion of AMCs to handle appraisal management as a third party vendor certainly had an impact. Appraisers in many of these cases were working for less money even as volume began to pick back up. Much of this has normalized as AMCs are now required to pay reasonable and customary fees. However, there are still a lot of “wait and see” attitudes reflected in the guarded optimism shown in the survey numbers.

Appraiser 1

Two other topics were brought up in narrative explanations to the question “Do you have any comments regarding the current state of the housing market?” Many appraisers commented on artificially low interest rates that would slow refinancing activity once normalized and small inventories that are artificially driving up prices.

Some specific comments on inventory were:

“Supply is dwindling.”

“Rates going up, prices coming down. The tight supplies are helping keep prices from dropping too hard.”

“Overall steady appreciation. Low supply in some markets.”

“Market appears to be slowly picking up and inventory is low.”

“Limited inventory.”

“Appears to be predictable due to low inventory and low rates.”

“Build some more new homes. Increase inventory to counteract the ridiculous appreciation.”

“Few listings, strong demand. Looks a bit like a price bubble.”

“Due to declining inventory, market values are increasing. If values continue to rise, inventory will probably increase.”

The tight inventory can be caused by a number of reasons and could vary by market. In some markets, investors bought cheap homes in bulk to turn into rentals, crimping the inventory of homes for sale. Availability also has been limited by homeowners who refuse to sell or can’t sell because they’re underwater or stuck in foreclosure processing delays. And of course, new construction has been depressed in many markets for several years.

Appraiser 2

Appraisers are seeing a situation in which prices are rising but they are hesitant to embrace it. Many believe that once new construction increases again (as it naturally will with increasing home prices) and supply catches up to demand, the market may not be as strong as we think it is.

A few specific comments on interest rates are included below:

“I’m worried with respect to possible increasing interest rates.”

“Wait and see if it keeps going and interest rates stay reasonable.”

“The housing market is being driven by low interest rates.”

“Watching rates and waiting…”

“Rising interest rates worry me.”

“If rates continue to increase, it will slow again.”

“I believe the housing market is only being propped up by the artificially low interest rates.”

“Once interest rates rise, the market will grow stagnant at best or possibly crash again.”

“I am concerned about how rising interest rates will affect home sales and refinances.”

“Housing appears propped by low interest rates and will suffer if rates go up over 5%.”

“Bubble is brewing due to artificially low interest rates.”

And of course, interest rates have risen recently and had a big impact on mortgage applications. The impact was reflected in our survey. We asked an additional question about trend in order volume. 33% reported decreased volume in the quarter vs. only 15% reporting decreased volume in the prior period. The drop in mortgage applications touches all corners of the mortgage transaction.

In addition to the general housing market questions, we ask a handful of questions to get an understanding of any issues the appraisers are facing and how we stack up with our competition. We believe that an anonymous survey is the best way to get honest feedback. We are a better company by seeking appraiser opinions and acting upon their constructive feedback. Our appraisers are our eyes into the local markets and the backbone of our business. We want to make sure we stay engaged and understand their vision of the marketplace.

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