In the last 10 days, I’ve become aware of 4 deals here where the bank-ordered appraisal for mortgage underwriting came in well below the agreed-upon sale price. In 3 of the cases, the appraisal was 9 to 14%. (In the 4th case, the house is very unique and presents somewhat different appraisal issues). A lot of people in the industry have laid the blame for this real estate and mortgage mess at the feet of the lenders, particularly with their lax standards, who were seemingly lending endless amounts of money on almost anything attached to a piece of dirt. There’s been a widespread call for tighter lending standards, and that’s just what the lenders are doing. One result is that appraisal standards are much tighter, and to underwrite a loan a lender is looking for rock-solid demonstrated value.
A lot more appraisals are coming up short compared to a year ago. During the go-go years, on those occasions when an appraisal came up short, a buyer was often willing to put in some additional cash to make up some or even all of the appraisal gap. After all, with the market surging ahead at 15% or more a year, you’d make up 5% or 10% in a few months. Today that’s absolutely not the case. I’m hearing that even among buyers who have the extra cash, they’re unwilling to pay anything above the appraised value.
More surprising, though, in this slowing market, is the unwillingness of many sellers to accept the reality of the appraised value. Some sellers, facing low appraisals, have made token reductions but are coming nowhere near to the appraised price (which is what the financing is based on.) One comment I heard 3rd hand was that the seller said, "Look, if they (the buyers) don’t want to come up with extra cash, we’ll just put the house back on the market and wait for someone who can afford it."
In my mind, that might have been a reasonable strategy a year ago, but it frankly seems foolish — from a seller’s perspective — today. But it just hasn’t sunk in with sellers yet that we’re in a different market, and that the price expectations they may have had 6 or 12 months ago may not apply today.