The Incredible, Shrinking Home Appraisal
Home prices have been falling for almost five years now. That sounds like good news for buyers, until you realize the monkey wrench declining prices can throw into the sales process. Falling appraisals can make it impossible to obtain a mortgage at the price a seller asks for a property.
- Real estate pros, buyers and sellers bicker over incredible, shrinking appraisals
- Falling appraisals beget falling appraisals
- An inadequate appraisal may be just one item to troubleshoot
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Who’s to Blame for Falling Appraisals?
Even if a buyer has great credit and a stable income, the loan’s not going to happen. Where this happens there are three options: 1) the seller can reduce the asking price; 2) the parties can cancel the deal; and 3) the buyer can put up more cash and take a smaller loan. Options one and two, which are most likely, tend to depress the value of property in the area. So falling appraisals and cancelled sales create a vicious spiral.
This ends when cash buyers who don’t need a mortgage cowboy up and start buying property. This is happening in some places. Many, if not most, cash buyers are investors. They see value where all mortgage lenders see is negative equity.
Mortgage lenders are obsessed with loan-to-value ratios. This seems sensible until you recall it was lending that fueled the real estate bubble in the first place. Appraisals reflecting constantly rising prices gave lenders the false impression that current – and future – values exceeded what they were lending. During this time lenders often ignored a buyer’s ability to repay, which instead of fairy-tale equity, should be the touchstone of prudent lending.
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