Don’t Rely on Appearances, You Have to Bore Underneath to Understand

I was crossing Madison Avenue in Manhattan the other day and one of the lanes was closed. I didn’t have the good sense to snap a picture of a utility company using a vacuum to suck out the loose dirt in a hole that was beginning to reveal a labyrinth of pipes and conduit. It made me think of Elon Musk’s Hyperloop One concept but not for the wonderment of underground transportation. As a self-proclaimed “dull and boring numbers guy” I regretted not coming up with his company name “The Boring Company” before he did – and why didn’t I think of that name back in 1986 instead of “Miller Samuel” for our appraisal company?

Australia Now Thinks I’m a Real Estate Agent

I had a long sit down and good conversation with an Australian news reporter. A few segments or our interview ended up in the story about a condo project known as 220 Central Park South, and the penthouse unit. Their chyron tagged me as a real estate agent (I’m not) although I’d love to enjoy the commission paid on the US$250± million sales price. #appraiser

The New Urbanism “Crisis of Success”

Real estate market participants are aware of the affordable housing in the U.S. and worldwide. Developing affordable housing, especially in urban areas, has always been a challenge. But in the past five years, affordability has become a full grown crisis. Richard Florida has been the leading speaker of the new urbanism movement and he now has some revisions to his original thoughts. In my view – and I’ve said it before here on Housing Notes – that housing supply creation is not elastic like corresponding demand. And housing regulations are one of the key drivers of high urban market housing costs. My other view relates to credit conditions have not normalized since Lehman and that low-interest rates inflate asset prices.

Here’s a good PBS interview with Richard Florida on the disconnect with the creative class movement and the high cost of housing. It is well worth listening (no multitasking while doing so!) to understand the nuances. Plus he talks with his hands like I do.

State by state look at what $200,400 will get you in house size

While we all seem to love info graphics and worry about the reliability of Zillow data, I chuckled when I saw the 1,113 average square footage for New York State presented by In Manhattan, $200k will get you about 100 square feet of living area, 1 tenth of the statewide average.

For those who assumed new development introductions were slowing down…

Curbed New York does a masterful (and mapful) job presenting the NYC new condo projects hitting the market over the next few months.

Why me? Ugly to you, beautiful to me

When an appraiser walks up to a house like this, the first thing we think of is “Why me?” Well, there is always a story behind a property like this and its part of why working in the real estate industry can be so interesting. In Manhattan, the asking price would not get you a 29,500 square foot home. You’d get the equivalent of a 900 square foot one bedroom.


Support Texas/Florida Appraisers In Need #Harvey #Irma

We’ve raised $11,400 as of this morning but need to reach our goal of $20K. Please help!

So it’s come to our attention that some appraisers are in need of help that were impacted by the flooding of Hurricane Harvey in Texas. We are an amazing group of people in this profession and group and we all know the hardships we face on a daily basis on any ordinary day. Well, now some of our very own have even more of a hardship than we could ever imagine. Please take the time to donate anything you can so that we can help them out. Let’s show our support and flex our muscles yet again. Thank you all.

This is co sponsored by Mark Skapinetz, Joe Mier, Lori Noble, Jonathan Miller and Phil Crawford.

Click here

Appraisal Industry Letters to Party Leaders of House Committee on Financial Services and Senate Committee on Banking, Housing and Urban Affairs on “No Appraisal” Waivers

The Appraisal Institute led the charge for the industry to write letters to the House and Senate that were critical of the GSEs new “no appraisal” waiver programs. I just sent Bill Garber at AI National a note suggesting they delete a duplicate entry of the “Mississippi Coalition of Appraisers” but other than that minor clerical issue, it is a great letter.

See both letters attached.

Fannie-Freddie-Appraisal-Waiver -House
Fannie-Freddie-Appraisal-Waiver -Senate

9 Unintended consequences from no appraisal mortgages by Tom Horn, SRA

Editor’s note: I can’t seem to reconcile the incredible urgency toward super fast and cheap appraisals and now no appraisals by the GSEs, lending and appraisal management company industry with creating a long term disaster. I probably sound like grandpa whittling on his front porch reminiscing about a simpler time when he could “put a penny in a burnt out fuse” (borrowed from John Prine). Are consumers truly begging to save some money by not knowing if a seasoned market expert thinks the home they just bought is wildly over priced? While I’m sure there is plenty of concern about keeping costs low, is it at the level being shouted by industry stakeholders? How about if there was no Federal backstop this time around? I’d be willing to bet that the moral hazard of this path and where it eventually ends up would evaporate if there was no potential for future bailouts? What about a clear criminal culpability as the slippery slope gains speed with future steps by over confident GSEs with low credit score portfolios?

Tom gave me permission to share his August 31, 2017, blog post 9 Unintended consequences from no appraisal mortgages in its entirety that sits on his must read Birmingham Appraisal Blog. Make sure you go to Tom’s blog and sign up for his weekly email and be sure to read through the comments on this post over at his site.

Are no appraisal mortgages a wolf in sheep’s clothing?

I’ve seen a lot of celebration recently from various players in the home purchase and mortgage game regarding the decision by Freddie Mac to skip getting a traditional appraisal. While it may sound good up front because they promise to reduce the cost to the buyer and reduce turn times, will this really occur? Are no appraisal mortgages too good to be true?

There most likely will be some unintended consequences from the transactions where a traditional appraisal is not used. Today I thought I’d share my thoughts, however, I’d like to hear from you as well. What do you think about eliminating the traditional appraisal from a mortgage transaction? They say this option will not be used all the time but only for qualifying purchases. Will it eventually include all purchases? Tell me what you think in the comments section below.

Possible consequences from no appraisal mortgages

1. Independence is lost- The appraiser is the ONLY unbiased party to a home purchase transaction. Everyone else from the agent to the loan officer has a financial stake at risk if the loan does not close.

When you remove the appraiser from the picture you risk removing the voice of reason. Appraisers are trained to measure the market value of collateral to protect the interests of the lender.

The steps involved in the appraisal process include weighing and comparing sales to the subject property in order to properly reconcile value. When an automated valuation model is used it is possible to be overly optimistic when interpreting the data and the independent nature of the appraisal is lost.

2. Inaccuracies in the size of the house will grow- When a traditional appraisal is performed the appraiser measures the home according to a generally accepted standard (ANSI). Using a set standard on every property helps the appraiser to compare apples to apples when it comes to the gross living area of a house.

Comparables are selected based on bracketing the gross living area of the home. If you use an inaccurate square footage figure from county records or from the owner and then bracket this amount it will prevent you from getting an accurate value indication from the sales.

Automated Valuation Models (AVM’s) look at the price per square foot of sales and then apply it to the subject. Whenever you have inaccurate square footage of the comps you arrive at a flawed price per square foot to apply to the subject. This inaccuracy is multiplied when you apply the wrong price per square foot to the subjects perceived living area.

3. Comparable selection- Choosing comparables is more than picking the 3 most recent sales that occurred within a one-mile radius. It takes human reasoning to pick comps that are the most similar to the subject property.

They say that choosing the right comps is 90% of the task in an appraisal assignment. If you choose the right comps the adjustments will be minimized and the value indication for the subject will be more accurate.

Appraisers have had a taste of the quality of comps that an AVM would provide with the Fannie Mae Collateral Underwriter (CU). The Collateral Underwriter is supposed to provide an automated risk assessment of an appraisal report. Part of this is looking at the comps the appraiser used and then possibly suggesting other comps that were not used.

The comparables that CU suggest are a joke at best. I have had lenders provide me with comps that the CU came up with that are not even in the same city as the subject. They include foreclosure sales when they are not even appropriate. We all know that school systems are a driving force in value, right? Many of the comps provided are from different school systems and would not provide an apples to apples comparison of properties.

4. Checks and balances for AVM’s will be lost– It is possible to compare a real appraisal with a Zestimate or other AVM to see how they vary but if the AVM is the only thing used then you don’t know how accurate it is.

Automated Valuation Models have been used for a long time, and in certain circumstances can be useful. They can be used to initially estimate a property value to make a preliminary loan decision, however using it exclusively is not prudent in my opinion.

Numerous appraisers have analyzed Zestimates and other AVM estimates by comparing them to appraisals they have done to see how closely they match up. The AVM’s are not consistent in their accuracy and can vary by a wide range. For lenders interested in having the most accurate value for their loan portfolios this is definitely not the way to go.

5. Consumers may not see the cost savings since the AMC or lender will keep charging a full appraisal fee- Will the consumer really see cost savings? Or will it be like it is now in areas where there are supposed shortages?

Why didn’t my house appraise for what I thought it would?I have heard instances where the borrower was told that there was a shortage of appraisers and the lender had to charge upwards of $1,500 to get the appraisal done. The borrower was charged this amount but the appraiser was only paid $300-$400, if that much, and the Appraisal Management Company (AMC) pocketed the rest of the money. Sacramento appraiser Ryan Lundquist wrote of a similar situation about appraisal fees that you should check out.

Why would a lender or AMC pass on the savings to the consumer and give up money that the borrower is used to paying anyway? In my opinion, this is just a way to increase profits. There may be a savings in time, but at what cost to the consumer?

6. Owners will not know the true value of their assets- Sale price does not always equal market value. Some people think that if someone is willing to pay a certain price and someone is willing to sell for a certain price then that is market value, but that is not always the case.

With all of the inaccuracies that AVM’s provide how will the homeowner know the true market value of their largest asset? It reminds me of several situations I have seen in the past when buyers were paying cash and did not get an appraisal to make sure that the price they were paying was too much.

Life situations necessitated the owners sell shortly after they purchased the home, but they could not resell the home for what they bought it for because it was overpriced. If no appraisal mortgages result in a similar situation it can lead to short sales, which is discussed in #7.

7. Short sales could increase- If a home sells for more than its true market value, and the AVM does not provide how to appraise in an appreciating marketan accurate value indication, the buyer could immediately be underwater in their mortgage. This could result in a short sale situation because the lender will need to accept less than the amount owed on the property.

We all know how short sales affected overall property values during the recession, right? If you have enough short sales, overall price trends could take a dip downward.

8. No brakes put on bidding war situation- The word on the street is that inventory levels are down across most of the country. This has resulted in a seller’s market with buyers becoming frantic that they will not get the house they want.

One tactic that real estate agents have used for their buyer clients is to create a bidding war situation where they offer a price over the list price in order to have the winning contract. If the contract is accepted by the seller and the transaction qualifies for a nontraditional appraisal mortgage this could create a problem that was outlined in #6 and #7 above.

In situations like this where a traditional appraisal is performed the high contract price would probably be questioned based on recent sales and active listings. The boots on the ground appraiser would be able to let the lender know that their collateral is worth less than what they are lending on it, which would help them make a better-informed loan decision.

9. Lawsuits against agents could increase- Many of the above-noted situations could result in consumers becoming frustrated when they find out that they bought a house for more than it was worth. This could increase liability to real estate agents since buyers may choose to sue agents.

Since an appraisal was not done, the true market value of the home was not determined. As I noted previously, some believe that if a buyer is willing to pay a certain price and a seller is willing to sell at a certain price then that should constitute market value, but in reality, it may not. A traditional appraisal determines the most likely price after looking at numerous transactions, including closed sales and active listings. It goes beyond the agreed upon price, although it also is taken into consideration.

As you can see, there may be some unintended consequences from Fannie Mae’s decision to provide no appraisal mortgages. Appraisers provided valuable input into the last housing recession before it began to happen, although many did not listen. Will eliminating appraisers from future mortgage transactions be worth the risk to the housing market? Only time will tell.

June 6, 2017, Appraisal Foundation Letter to FHFA over Waiver of Appraisals Issue

Now that the false narrative of “appraiser shortage” by AMCs, Lenders and Large Appraisal Firms has been countered by the appraisal industry (absent AI National), the discussion of new policies from the GSEs concerning appraisal waivers seems especially irresponsible. In addition to the false shortage narrative, it was a reaction that was enabled by the refinance boom that is now over. It also shows how little the GSEs understand about the appraisal industry and the damage done by AMCs. FHFA has been spoon-fed an out of context storyline by parties with a financial gain. I also assume they are feeling particularly confident with a very high portfolio credit score created by mortgage underwriting disconnect from current risk reality.

Here is the letter sent by TAF to the GSE regulator FHFA that clearly outlines the FHFA disconnect concerning “No Appraisal” waivers.

I like to paraphrase Mark Twain, “history doesn’t repeat itself but sometimes it rhymes.”

APPRAISER FORUM & FESTIVAL – Real Estate Appraisers Are Holding A Convention for Real Estate Appraisers

In the rush to hold conferences for the real estate appraisal industry, the big stakeholders forgot about the real estate appraisers themselves. Next year there will be a new event and we hope you can make it. Details coming. I can’t wait.

RAC Conference Frisco TX: Changes, Challenges, Solutions

As I’ve said many times, the annual RAC conference is the best appraiser-centric conference I’ve ever attended. It is developed and operated by active appraisers who are working to help you thrive as a professional.

As the current president of RAC, I’m proud to be part of an organization comprised of the best residential appraisers in the U.S.

Click here for more information.

A Brilliant Idea

If you need something rock solid in your life (particularly on Friday afternoons) and someone forwarded this to you, or you think you already subscribed, sign up here for these weekly Housing Notes. And be sure to share with a friend or colleague if you enjoy them. They ‘ll become boring, you’ll discover a Hyperloop under your garden and I’ll keep digging.

See you next week.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

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