Changing the rules in the middle of the game.
Nasty infighting is roiling the (presumably) normally collegial atmosphere of Las Vegas real estate, with implications for real estate everywhere. In addition, the story says something, if something still need be said, about the typical real estate news article and the typical reader response to same. And it may also give us a clue as to who that typical reader is.
With its opening sentence, a June 5, 2009 article in the Las Vegas Sun, "Realtors complain about 'low-ball' appraisals", tips off its agenda: "Despite a 77 percent increase in existing home sales this year, some Realtors are complaining that low-ball appraisals are stifling sales". Now there's a softball any reader with a grudge against complaining Realtors®, or any kind of Realtors, or the real estate market in general, or perhaps life in general, can hit out of the ballpark. It makes me wonder how the reporter, one Brian Wargo, the Sun's "In Business" (but not necessarily "Pro Business") editor, might've been written his lead-in back in the pre-Internet peanut gallery days, before readers could cheer or boo news stories (and reporters) with a few clicks of a mouse.
How else might Wargo have phrased his lead-in? How about "Although existing home sales have increased 77 percent this year, some real estate agents say that 'low-ball' appraisals keep sales from being even higher." Nope, sorry, doesn't meet the reader-red-meat test. At least Wargo didn't say "cripes, those greedy real-la-ters sure are inveterate whiners". Then again, he didn't have to, which gives us a good working definition of the difference between the professional story teller (say, the reporter) and the amateur (say, the blogger): like a good novelist, the professional guides his reader but leaves her imagination something to chew on. But note that Wargo's lead-in implies that Las Vegas existing home sales could only go up 77 percent this year and, in fact, should only go up 77 percent, and that he wishes "some Realtors" would pull up their socks and quit complaining.
Wargo goes on to say, "Realtors [not "some" Realtors this time and, for that matter, never Realtors®] contend that several appraisers are setting values that are much lower than they should be—and that these appraisals are killing sales". According to these malcontents boo! hiss! local appraisers are over-reacting to accusations that they pumped up home prices during the Las Vegas real estate boom.
One Las Vegas agent claims that "appraisers are being very conservative. They are trying to cover themselves." The article says that while low-balling doesn't affect sales of lender-owned homes, which make up two-thirds of the Las Vegas market, it's often a deal killer for conventional sellers who, "for example, bought their home for $300,000 and are now selling it for $220,000...If the appraisal came in at $205,000, that would force the seller to lower the price or the buyer would have to come up with $15,000 to make up the difference because the bank would loan only up to the appraised value". Seller, already faced with taking a haircut, refuses to (or can't) take less than the contract price, despite what the appraisal says. Buyer, now positive Seller's house is worth, not the $220,000 her gut and market knowledge told her, but the $205,000 the appraisal says is its real value, refuses to offer more. The deal falls apart, affecting not just greedy whining Real-la-ter boo! hiss! but also Ma and Pa Seller oh yeah and not just Ma and Pa Seller but also Suzie Buyer huh? who, at the least, has dropped $500 on an appraisal but been saved from herself! So much for the "empowered real estate consumer", I guess.
"I would say it is not causing us to lose all of these sales," says the agent, "but it is affecting 20 to 25 percent of the sales". Using this estimate, low appraisals are kicking at least (100% - 67%) x 20% = 6.6% of total Las Vegas sales out of escrow. Use the upper, 25 percent estimate and the casualty rate inflicted by alleged low-ball appraisals is closer to one in ten total Las Vegas sales. That's significant. Looked at another way, appraisers allegedly covering their rears may be costing either one in four or one in five conventional sellers either thousands of dollars or a blown sale.
This elicits a scoff from a local appraiser, who assures us that appraisers "are not worried about covering themselves if they are doing a good job", a perfect-world virtue-is-its-own-reward scenario that might suggest, if nothing else does in this article, that some Las Vegas appraisers are, if not bending over backwards, then at least looking nervously over their shoulders. Because appraising isn't the cut-and-dry objective process most people assume it is. Subjectivity is inherent, from choosing the "comps" to weighting the adjustments. Get two appraisals on the same home and it'll be a miracle if they both come in at exactly the same "fair market value". That's because homes aren't commodities, which is probably why I've never heard of anyone appraising a pork belly.
Finally a local mortgage broker weighs in: "I think appraisers are scared to get blacklisted. If the appraisals are too high, then banks may no longer accept appraisals from that person."
So now you know more than you ever thought you would about the Las Vegas real estate market and, furthermore, you find yourself wondering if you care. How can low-ball appraisals in some distant city that's a poster child for distressed sales be relevant to our little corner of paradise?
For one thing, appraisals here are no longer the "gimmes" they once were, regardless of price range, which should tell you that lender attitudes toward appraisals in this area have changed as well, which might tell you that lender expectations of appraisals in general have changed, but especially in what until recently they labeled "severely declining markets" like Las Vegas, which means that, yes, they've changed the rules. Which gives credibility to the idea that if lenders think prices have further to fall in distressed markets like Las Vegas, they'd like those Las Vegas appraisals to give them a little cushion. While I haven't had a problem with appraisals, even in an area like Central San Jose where prices have dropped like a rock, anecdotal evidence from throughout the Bay Area tells me that what might be called "appraisal risk" has become such a factor in the sub-$500,000 market, particularly with aggressively-priced bank-owned homes that often get multiple offers above list price, that sellers are often going with all-cash offers even if those offers aren't the highest. Unpredictable appraisals (and last-minute lender "conditions") have apparently succeeded in making cash king, a far cry from the admittedly risky 100 percent financing common to the same neighborhoods a few years ago, but a retrograde step that takes us back to maybe 1934. (The Mortgage Bankers Association just lowered its forecast of mortgage originations for 2009 from $821 billion to $737 in part because of a "higher than normal...share of all-cash home purchases".) And for all involved—which is anyone who doesn't live in a rough cabin deep in the Rockies—1934 is just as bad as 2005.
But by now it should be obvious that the appraisers-are-sand-bagging-the-real-estate-recovery debate may not have a definitive answer. Who do you believe, assuming you care? If you do care, enough to respond online to a newspaper article, why do you, and does the reason you do affect who you believe? To find out, let's check out the fourteen reader responses posted on the Sun's Web site as of the afternoon of the article's publication.
It shouldn't be breaking news, especially considering the article's lead-in, that most of the responses seriously pan real estate agents. Here's an excerpt from a typical post: Now the realtors are complaining that the houses are being appraised to (sic) low. After making their money and watching homeowners lose their homes because of inflated prices that couldn't hold water, they should be ashamed of the way their (sic) acting now. Of course, plenty of agents made money, and sometimes very good money, during the boom, although I can't believe that anyone got filthy rich selling $300,000 homes unless they were selling them by the boxcar-load, but this poster erroneously assumes that a) agents are responsible for inflated prices no, it was appraisers! no, it was loose underwriting! no, it was sun spots!, and b) agents are responsible for the buyers who took out loans they couldn't afford sun spots!, and c) only agents lose when appraisals come in low every economic activity occurs in a vacuum! The poster's conclusion—that therefore anything agents say should be ignored—is just as flawed.
Here's a poster who's got it all figured out, yet still doesn't quite get it: Newsflash: real estate agents work on a commission, appraisers for a set fee. The higher the sales price, the more money the agent gets. Of course they want the value to come in high. The appraiser meanwhile doesn't get a piece of the action, so is not biased in the same fashion. So now when prices are low, it's the appraisers' fault that the agent is getting less money than they want? Please. This isn't "news"; it's more of an attempt to ridicule and manipulate a profession which is no longer operating as a lap dog for the Realtors. It's easy to assume that the guy working on commission has more to lose than the guy working for a set fee but, as the article implies, appraisers have plenty of skin in this game too: if lenders don't like their work, appraisers don't work, and if appraisers know, or think they know, that lenders want low appraisals, they'll feel considerable pressure to oblige. Which calls into question whose "lapdog" appraisers were and may still be. Funny how this poster, who seems to know everything about the seamy underside of economic incentive, doesn't see that the appraiser may have even more at stake than the agent. Funny how people assume that one independent contractor, the agent, has more control over the market than a huge financial institution. Which suggests that, despite the bad press the mortgage bankers have been getting lately, they're pure as the driven snow compared to those whiney greedy real-la-ters.
And once you strip the gratuitous realtor-baiting from the Sun's article, its point, which not one of the fourteen posters seems to get, isn't that the low-ball appraisal in the example above reduces the agent's commission by a couple hundred dollars after the typical commission split with her broker. The point is that low-ball appraisals and, even more to the point, changes in lender expectations of appraisals, hurt not just anyone who wants to buy or sell real estate, but also anyone who'd like to refinance, perhaps to save their home and, for that matter, anyone who owns real estate and, for that matter, anyone whose near-term well-being depends on a speedy if disciplined housing recovery—in Q1 2009, Las Vegas homes were undervalued 40.9 percent according to consultants IHS Global Insight—which is just about everyone.
So it's no longer just a feel-good matter of sticking it to whiney greedy real-la-ters. Because not only would arbitrarily low appraisals and the alleged lender pressure behind them inject still more uncertainty into an already uncertain market and, as we've seen over the past year or so, uncertainty reduces market values, always significantly and sometimes catastrophically. They'd also change the rules of the marketplace, which would further reduce values. It'd be like an umpire deciding in the middle of a tennis match to re-stripe the court so that the trailing player has a larger area to defend.
Market players need consistency, or at least as much consistency as markets can offer. So here's an idea novel in its consistency: if appraisals done during a boom invariably and miraculously come in at purchase price, then appraisals done during a bust should too. If the appraisal industry isn't even a speed bump on the fast lane to irrational exuberance, then why should it be a roadblock to sustainable recovery? Regardless of what this says about the watchdog role of appraisers, if appraisals are a constant in the market equation when prices are rising, why should they be a random variable when prices are declining?
Unless, of course, lenders aren't particularly interested these days in lending in areas where their existing loans are going into default in record numbers. The kind of affordable areas where, not too long ago, mainstream lenders had no interest in lending even in good times.
Ultimately, of course, it's all about risk. When prices are rising, lenders (like buyers) see little or no risk in the future and communicate this to appraisers, either directly or, I suspect, usually indirectly, principally by not questioning high appraisals. Appraisers do face risk in a rising market, but not the risk of coming in too high, but of coming in too low. Don't "make the price" once and everyone involved—buyer, buyer's agent, seller, listing agent, mortgage broker or lender's loan agent—gets quite perturbed. Don't make the price repeatedly and you don't get more appraisal assignments.
But when prices decline, lenders see risk quite clearly, even where it doesn't exist, and appraisers apparently operate under a new set of lender-influenced and, it seems to me, even more artificial, constraints. As I've mentioned before, it appears to me that, in both boom and bust, the appraiser functions less as a watchdog of market integrity; in fact, the skeptical observer might say that if this really were the role of the appraisal industry, it's done a less than stellar job.
To which I would respond that not only were very few market players seemingly interested in seeing the appraisal industry protect the market's integrity, but that the role is not only impossible but largely irrelevant. It reminds me of the brave little Dutch boy plugging the crumbling dike with his finger. The purpose of the appraisal is not to protect the buyer (who only pays for it) and not to protect the marketplace or society, but to protect lenders (who may or may not want or even need protection). No, even now, despite the new polite fiction of the neutral third-party Appraisal Management Company (which could be wholly owned by the lender), Andrew Cuomo's "he cleaned up the mess" ticket to higher office and emergency fig leaf for the mortgage banking industry, I still see the appraiser more as just another remote-controlled valve in the lender's distribution pipeline. In good times, the valve is left full open. In bad times, the valve is partially closed. So when the Las Vegas appraiser claims that appraisers have no worries as long as they're "doing a good job", and when one poster implores "let the appraisers do their job!", one might ask: which job? And is that job the one everyone thinks it is?
If the fourteen posters were all homeowners, you'd think that self-interest if nothing else would have them steaming over low-ball appraisals. So it's telling that eight are perfectly happy with the idea of low-balling. Of the remaining six, one is a self-described buyer convinced that appraisers are indeed low-balling; one is either neutral or failed to make his point; three favor the idea that the market, not appraisers, sets value; and one wishes appraisers had been low-balling five years ago when he bought out his ex-wife (which, in my limited experience in the matter, suggests he got the wrong appraiser).
So here's a guess as to who read this article the day it was posted, which is to say, its most likely core audience:
Extrapolate this breakdown to Internet real estate discussion in general, and you deduce that most—three in four—posters don't currently own a home. Then use the knowledge, gained from experience, that most people, once homeowners, don't return to renting, and you extrapolate from this that most of these non-homeowners have never owned a home, never been in the shoes of a homebuyer, never been in the back seat of an agent's car, never been involved in making an offer, in short, never been involved (at least successfully) in the homebuying experience...
...and this explains a lot about online real estate discussion. The irony isn't just that so many take that discussion so seriously. The irony is that those with the least at stake are often the noisiest.
Which is why the peanut gallery is unlikely to ever be a market mover. More likely is the idea that a handful of appraisers, imbued either with new-found zeal or old fears over job security, or maybe just thrilled to suddenly matter, might do their part to slow the recovery of real estate in particular and the economy in general.