Could Certain Price Increases Cause Another Market Crash?

Something is happening in the local market that is very scary, and could lead to disastrous consequences for the housing market. It is hard to understand, and even some appraisers do not know how to respond, but it IS going on and it is alarming…

Fannie Mae has a program called Homepath. It gives buyers, especially first time homebuyers, the opportunity to purchase homes without large downpayments, without appraisals, and without competition from investors (at least for the first 2 weeks the properties are listed). Sounds incredible, right? Here is the catch: the bank sets the price. Oftentimes these properties, especially as of late, are listed quite a bit over comparable sales values. The buyers are willing to pay the prices, because they know there is no appraisal and they also know that they likely will be outbid by investors or those buyers with higher downpayments.

All this may sound like a good idea – the buyers get a home, and there is now a higher comparable property in the neighborhood at closing time…good for future sellers, right? Unfortunately it is not that simple.

An example might illustrate this better:

Neighborhood comparables in ABC Neighborhood say homes are selling at an average sales price of $180,000. One completely remodeled home sold in the neighborhood for $200,000. Fannie Mae Homepath property is listed at $235,000. It has been painted and cleaned up, but not exceptionally remodeled. Mr. and Mrs. Buyer purchase the home and it closes escrow – neighborhood comps are now higher ($55,000 over average sold prices). Mr. Seller (who lives next door and has just completed a full remodel, with high end flooring, new stainless appliances, etc.) lists his home at $240,000 and gets into contract for that price. Mr. Seller’s home does not appraise and he has to either sell if for less OR wait until the market goes up.

Are you confused? It seems simple that Mr. Seller in the above example should be able to sell his home for more than the last comparable property (the Fannie Mae Homepath sale), as he had an identical floorplan and substantial upgrades. But the fact of the matter is that there is a good chance that Mr. Seller might not even get the same amount – $235,000 – as his Homepath neighbor. Why? Because most appraisers will look at the comps in general, and include the Homepath sold property as one sale in the mix with other sales over the last 6 months. Because the price is so much higher, Mr. Seller likely will not benefit from the high sales price.

This sounds insane but it is true, and I have confirmed it with appraisers. The bottom line is that the Homepath sales, when sold at higher prices than comparable solds will support, are falsely inflating the market values. Can you see all the potential problems here? If we have falsely inflated market values, it could lead to 2 big problems:

1.  Prices could rise too fast in short periods of time, causing a replay of what happened in the early 2000s

2.  Home buyers – especially first time buyers – will be priced out of many markets, and unable to purchase homes

3.  Sellers will not be able to take advantage of higher sales prices right away, unless appraisers focus on the higher priced sales and not the rest of the sales – and this could reasonably happen in a period of several months where there is a Homepath property comparable sale, creating a big jump in sales prices in some neighborhoods. This could either cause fewer homes to be listed – not good for a market with an already-low inventory, or cause a rush to list – with the possibility that many homes will not end up closing (either because the buyers’ lenders won’t appraise the values, or sellers and buyers won’t be able to renegotiate sales prices).

All in all, we are dealing with a scary scenario. Luckily Homepath properties are few in most areas. But if you live in a townhome or condo under $300,000 there may be several in your neighborhood. This is one of those situations that we will have to watch unfold. I welcome comments on this from agents, appraisers, home buyers and sellers…many people do not even know this is happening. If we start a discussion maybe we can make others more aware.