There are many people who feel we are headed toward another real estate bubble. With scare inventory, increasing prices, bidding wars, multiple offer situations, governmental programs falsely inflating prices, and buyers willing to pay over appraised value to purchase a home, it is easy to see why many feel this way.

Today’s market is very different from that of the early 2000s. Let’s look at the differences to determine if a crash is likely:

1. Scarce inventory. The lack of inventory is problematic, and it is the biggest issue amongst buyers’ agents. It has led to some desperate measures on behalf of many borrowers in order to get their offers accepted in multiple offer situations, which are common (see below). Back in the early 2000s we did not have inventory issues. People were selling homes right and left, moving up. The ease at getting loans made it simple for almost anyone with a job to jump into the game and purchase a home. Today’s scarce inventory is definitely driving demand, but there are other factors that prevent the frenzy we witnessed years ago.

2. Tighter lending standards Back in the early 2000s, lenders were heavy players in handing out loans to anyone, even those who were not really qualified. Inventory was not scarce like it is today, and loans were very easy to obtain, with no-doc loans that bypassed employment and income verification – types of loans that are pretty much impossible to get today (unless one wants to go through a private lender and pay a very high interest rate). Today it is not easy to get a loan; even with strong employment history and good credit would-be borrowers  have to jump through hoops.

3. Stricter appraisal standards. In the early 2000s appraisal standards were very loose – we saw drive by appraisals, and basically many appraisers were just gold stamping contract prices without deep scrutiny. Today appraisers will not do so, and must adhere to strict guidelines. Prices have increased in most areas, and appraisers do take this into consideration, but it is no longer a free for all when it comes to appraisals. The appraisers with whom I have spoken say they are not 100% caught up with what is happening in the market, and guidelines prohibit them from looking at only the last sale, which may be tens of thousands of dollars higher than other sales in the neighborhood in the last 6 months…thus they have to look at both in order to assess value.

For example, let’s say in your neighborhood 4 similar homes sold in the last 6 months at close to $450,000. A fifth home, also similar to the other four, then closes escrow at $500,000 (there could be many reasons for this – bidding wars, cash buyers, buyers paid over appraisal value, or a government agency could have falsely inflated the price – click here for more information on this.) You decide to list  your home now, based on the $500,000 sale, and you do so. A buyer comes along who offers that price, but the home appraises lower. This is because the appraiser will look at all five sold properties, not just the last sale.

4. Buyers paying over appraised value. Many buyers don’t care what the appraised value is, and they are willing to pay the cash difference between it and their loan amount. This has been common in many areas, and is a factor in increasing comparable value. This tactic puts those buyers in the most expensive homes in their neighborhoods (which is never a goal, but what many feel they have to do to get their contracts accepted today). Back in the heyday of the early 2000s we didn’t really see this issue because we didn’t have appraisal issues. So this time around it is the buyers who are driving the prices higher due to the lack of inventory and the high demand.

I believe that we will not see another housing crash, based on the above factors. What I think will happen is that we will see the higher prices and lower inventory for a while, possibly until the end of this year, and then at some point things will level off. Many homeowners who have been underwater (their home is worth less than their mortgage balances) will find themselves no longer so due to rising prices. This will allow them to sell their homes, creating more inventory and less distressed property. At that point prices will simmer and stop escalating, and we will finally see a return to “normal” market trends.

Is Fannie Mae hurting the real estate market? Those following the practices of this government lending giant know that as of late, Fannie has been accused by many in the industry of price fixing and falsely inflating the real estate market. What is going on, and how can this happen at this time, after the housing market is finally on the road to recovery?

The majority of lenders and those who guaranty loans seem to be cooperating recently with foreclosure avoidance, opting for the less painful option of short sales. They claim that not only do they want to ease the homeowners’ pain, but that they do not have a desire to own property, and would rather take a loss sooner than have to go through the foreclosure process – one which has a hefty price tag.

There is one exception to this rule, and real estate agents are baffled. Fannie Mae – a government agency, who along with it’s cousin Freddie Mac guarantees and purchases loans, and owns or controls about 31 million U.S. mortgages  – has been implementing some strategies lately that go against this notion, despite statements of intentions to help:

1. Price Fixing? One of the claims expressed most frequently as of late by real estate professionals is that Fannie is engaging in price fixing. Here’s how it works: instead of opting for short sales, it is choosing to proceed with foreclosures. Then, once the home is ready to list, it’s selected agents list the property for over comparative market value, under Fannie’s Homepath program. No appraisals are needed, as Fannie is the largest provider of mortgage credit. Buyers are jumping in and paying over market value for these properties, and are closing escrows.

Initially this looks like a win-win, as the buyers get their home and do not have to go through the appraisal process, and the area comps are raised with the closing of the property at a value  higher than any other recent sales, thus increasing comps for the next seller. Sounds good, right? Not so fast.

The downside of this tactic is that the buyers are literally moving into their new homes as UNDERWATER homeowners. Their homes have no equity – they own the most expensive property in the neighborhood because Fannie has falsely inflated the home values. Appraisers will not look solely to the most expensive home that sold, but will include it with the other comps…thus leading to the next problem:

As  a result, future sellers will not likely benefit from the most expensive neighborhood sales (for more on this click here.). Appraisers will include the most expensive sale in their analysis, but they will not focus solely on that one sale; thus the next home to sell, even in better condition and with more to offer, will be evaluated by appraisers based on the combination of recent sales. What seller in their right mind, who did not have to sell, would choose to do so in such a situation? This will keep homes off the market, sustaining  low inventory levels.

2. Countering short sale offers at prices higher than comparable sold properties. Another tactic that is being used by Fannie when they DO agree to short sales, is to counter offers received higher than comparable sold properties. Again, this is crazy! These homes will not appraise, but still there are buyers willing – and doing it! – to pay cash over and above appraisal value in order to close escrow. Again, these new homeowners move into their homes in negative equity positions. This tactic also prices many homebuyers out of the market.

I’m not sure how to explain what is going on, but it scares me. Our market is healing right now, and if prices are falsely inflated and comparable sold properties ignored, we will see large market increases in short time periods. If you remember, this is what led to the last market crash. Please share your thoughts.

There has been a lot of talk lately in the real estate industry about inaccurate appraisals resulting in cancelled home sales. Appraisals have definitely been more challenging, as lenders and their underwriters place strict requirements on the use of comparable properties and of what exactly that can include. Both sellers and buyers have a few ways of helping to assure that appraisals come in at contract value.

Buyer Options: Buyers do not have much say in the outcome of their appraisals, and cannot communicate with the appraiser, but they do have some options when appraisals do not come in at contract value.

1. Renegotiate the contract price. The buyer and seller can renegotiate the purchase price to reflect the appraisal value. Sometimes the seller may not be willing to do so.

2. Pay the difference in cash. If renegotiating is not an option, the buyer can choose to pay the difference between the contract price and appraised value.

3. Negotiate a compromise with the seller. Sometimes the parties can reach an agreement that will allow the sale to move forward. This can include anything from meeting in the middle of the contract and appraisal value, with the buyer laying down some cash to close, to the seller accepting the appraisal value and not contributing to any repairs that were agreed upon, and many other creative options.

4. Challenge the appraisal and request a second appraisal. The buyer can always challenge the appraisal with pertinent additional facts and/or comparable properties that were not considered in the report. It may also be possible to request a second appraisal, which the buyer may have to pay for. Speak with your real estate agent and your mortgage professional to decide how to best accomplish this method, as you must have information that that you feel should have been but was not contained in the report.

5.  Cancel the contract. If none of the above options work or are desired you can always elect to cancel the contract. Take into consideration that you have likely spent money on a home inspection and of course, on the appraisal.

Seller Options:

1.  Educate the appraiser. The most important way a seller can help an appraisal come in at value is to ask the listing agent to prepare a report for the appraiser. In it, the agent needs to review the comparable properties and compare and contrast them to the subject property. It is also important to point out any upgrades or special features the home possesses, like a view or large yard, the fact that it’s on a cul de sac, or even things that may not be obvious, like green features and energy efficient appliances. Include photos of the comparable homes and the subject house, and a list of costs spent on any improvements.

2.  Challenge the appraisal. Like the buyer, the seller can always challenge the appraisal with pertinent additional facts and/or comparable properties that were not considered in the report. See above.

3.  Renegotiate or compromise: (see above).

4.  Cancel the contract. This is always an option, but make sure that you have a plan moving forward. If you are planning on re-listing the property in the hopes of finding a cash buyer or another buyer who will pay the difference, keep in mind that you will likely be required to disclose the appraisal report from the first buyer. If you are thinking of renting the property make sure to crunch the numbers and take into consideration rent amount, property taxes, homeowner association payments and/or assessments, insurance and maintenance costs.

Appraisals, like many home sales, can be challenging these days. Over-improved properties and properties in neighborhoods with multiple distressed sales (that tend to sell for less) are especially at risk for low appraisals. But if you and your agent are prepared and have done your homework, there can be a successful outcome even when an appraisal does not come in at contract value.

Photos courtesy of Dreamstime

Did all the complaining work? It appears that the controversial Home Valuation Code of Conduct (HVCC)‚an appraisal system that was the brainchild of Fannie Mae and Freddie Mac and caused much aggravation amongst Realtors, home buyers and sellers, mortgage brokers and appraisers‚may be thrown out the window.

The House Financial Services Committee approved a bipartisan amendment last week that would terminate the Code and replace it with a new set of rules and creation of a new Consumer Financial Protection Agency. The new rules would apparently not be as confining upon appraisers, a problem that caused many property appraisals to come in exceedingly low, which in turn caused many home purchase deals to fall out of escrow.

The purpose of HVCC was to give independence to home appraisers. It created a slew of appraisal management companies, used by many lenders, who would in turn pay the appraisers a fee to work an appraisal. Oftentimes these fees were low and less than appraisers normally made.

Many appraisers were obtained from out of the area, which unfortunately meant that they were often unfamiliar with the neighborhoods in which they were working, AND they sometimes lacked experience (as established, experienced appraisers would not work for such reduced wages).

Furthermore, these management companies would then charge all or a portion of the appraisal fee to the home purchaser, making a nice profit in the end. These factors caused many escrows to be delayed, and others even fell through because the value did not match comparably sold properties.

Over the last several months the National Association of Realtors, the National Association of Home Builders and the the National Association of Mortgage Brokers have been standing behind member complaints to push for changes to the HVCC. It seems to be finally working. If the new rules come into play the housing market should be able to continue on the road to recovery.

Just goes to show you how DOING SOMETHING makes a difference!