- Home prices are soaring, and appraisers can’t keep up. It’s making buying a house even harder.
- Appraisers influence how much buyers can borrow. Buyers are willing to overpay, but appraisers are halting their plans.
- With bidding wars roiling the market, appraisers are frequently underestimating just how much prices are surging.
US home prices are surging higher at the fastest pace in at least 45 years.
Many appraisers, however, don’t think it’s so bad. They continue to downplay this home inflation, adding one more nuisance for buyers already pummeled by the red-hot market.
Buying a home today isn’t as easy as paying the listing price. The US is stuck in a housing shortage, with estimates of the home deficit ranging from 3.8 million units to 6.8 million. That’s given way to frenzied bidding wars over the few homes left available.
But even when a buyer wins out, home appraisal can throw a wrench in the process. For example, a buyer with a house under contract for $US500,000 ($AU668,136) would likely put 20% – or $US100,000 ($AU133,627) – down and borrow the remaining $US400,000 ($AU534,508) with a mortgage. Yet if the house is only appraised at $US450,000 ($AU601,322), the lender will likely offer a smaller mortgage. If the buyer can’t pay the difference, the sale could fall through.
Those mismatches between appraised value and selling price are more common than usual. The appraisal gap – which tracks how many purchases feature a contract price above the appraised value – was 11% in September, according to CoreLogic data. While down from a peak of 20% in May, that’s still well above the historical average of 6% to 8%, the firm said.
Put simply, homes are frequently selling for more than appraisers think they’re worth.
“The data clearly shows the impact of fast-moving markets and buyer behavior – specifically a willingness to pay a premium price – on the homebuying, mortgage, and appraisal process,” added Shawn Telford, chief appraiser at CoreLogic.
Emotional bidding or housing-as-usual? Appraisers can’t tell
The market is so fast-moving that appraisers can’t keep up. They will factor in similar sales, pending sales, and active listings on comparable homes before arriving at a final figure. The process is generally reliable in times of normal market activity. But when speculation, bidding wars, and record-breaking price growth are added to the mix, it’s tougher for appraisers to do their jobs.
It can also be hard for appraisers to separate actual market trends with “emotionally driven” purchases, Telford told Insider. Buying a home is inherently an emotional experience, as it’s often Americans’ single largest purchase.
Yet testing the market has been even more emotional in 2021. The housing shortage has made it hard to find available homes, and those who do often compete with several other pandemic-era movers. Anecdotes abound about Americans being outbid, overpaying, or waiting for the market to cool.
When homes sell for well above their list price, it can be tough to determine how much of the overshoot was representative of the market, and how much was fueled by emotions, Telford said. That gap leaves appraisers even more in the dark.
“In a fast-moving market, upwards or downwards, a home that sold and went under contract two months ago and closed one month ago may not be representative of the current market conditions,” Telford said. “It can be difficult to pin down the actual appreciate rates for anyone, including appraisers.”