Should Foreclosures Be Usable in Appraisal Values?

Currently 3 states, Illinois, Nevada, and Missouri, are proposing legislation that would completely ban all foreclosures from being usable by appraisers when they attempt to determine the values of homes in a neighborhood. 

Why would this legislation be good?  Well, first off the prices at which foreclosures are selling has been acting as a dead weight anchor on housing prices for the last 3-4 years.  Foreclosures regularly sell for 10-20% less than the average sales price of non foreclosure homes in similar condition in the same neighborhood.  Banks need to get these properties off their books to free back up their capital and lower their carrying charges (cost accumulated on a home that you are holding for no purpose) so they try to price them low in order to get offers faster.  Typically, foreclosures are not in good shape as either the previous owner stopped caring for the home when their money ran out, so they can sell for even lower than that 20% below market value when they need a lot of work. Once a foreclosure is sold at one of these much lower price levels, it becomes a “comp” which is Real-Estate-ese for a comparable home that is used to help determine other homes values. 

If an appraiser uses a foreclosure as part of their selection of “Comps” it is going to reflect negatively on the value of those other regular sale homes that are in better condition, often pulling those home’s values down in the eyes of the appraiser.  If the appraiser decides that the foreclosure lowers the value too much, they can “under appraise” the home, or give it a value lower than the sales price.  This usually results in the sale of that home falling apart.  If the sale does go through at the lower price, that reduced value on the regular sale is now a “comp” too, meaning that all other regular sales are reduced to that level for future sales as well.

Under the current rules of appraising it isn’t considered a bad thing for an appraiser to under appraise a home (only if they over appraise a home do they usually get criticised for their appraisals by the banks/review boards that hire them), so if given the option, most appraisers will continue to use foreclosures in their comps which will continue to hurt values of homes for the foreseeable future.

If it is made illegal to use foreclosures in appraisals there would at least be one less factor exerting negative pressure in our property values, meaning that values of homes would function more as a result of supply and demand like they are supposed to again.  It will still be hard to get an appraiser to agree with a purchase price that would show an increase in value (even if it is justified), but at least it won’t give them as much of an excuse to push the values down more. 

The negatives on doing this…I really can’t think of any…in fact I would go a step further if I was proposing the bill and put Short Sales (pre-foreclosure sales) on the list of types of sales to ban from being used as comps as well! They usually are selling for about the same price range as foreclosures these days and cause the same problems, so why only eliminate half the issue? 

Will it happen in any of these states?  Who knows, but its a good idea if you actually believe in protecting the values of homes in a way that makes total sense and harms no-one. 

Maryland, my home state, had proposed similar legislation, but decided instead to debate making trans-sexuals a protected class in Maryland this past week, so they removed this bill from the dockets (I wish that this was a joke, but yes, debating cross dresser and cross gender issues was more important to MD’s legislature this past week than dealing with the economy and real estate…not that those people don’t deserve rights, but was it really the right order to be dealing with these issues in? Moving gets tempting on days like this…)

For the source article related to this subject, go to http://www.dsnews.com/articles/three-states-move-to-ban-foreclosure-sales-from-appraisal-values-2011-03-30

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Bernanke Weighs in on Housing Market and the Future

Chairman of the Federal Reserve Board, Benjamin Bernanke spoke last week at a conference of Economists in Jackson Hole, Wyoming (a much better place to visit in winter when its ski season, I might add) to discuss the economy and the challenges facing us moving ahead.    While there he took a few moments to prognosicate on the future of the housing market in this country.  Read his quote below the jump.