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Monday, October 31, 2011

The appraisal debacle

One of my builders just got an appraisal back on his own house which he has been constructing for the past year or so. Being in the business, and having been very successful, he worked hard to create a home that would last for a considerable time. He started on one of the best lots available in the area, which he acquired at a reasonable cost, the style and layout of the plan is the epitome of what the market here is looking for. He bought it out using freebies from a host of loyal subs who have appreciated his business over the past 15 years. In short, you could hardly do better for a custom home in our area in the year 2011. The appraisal came back nearly 200k less than his cost. Roughly half of what it would sell for even in today's depressed market. What the heck is going on?

It began with the implementation of HVCC (house valuation code of conduct) which was basically a politically generated instrument designed to prevent fake valuations from further infecting the mortgage debacle. As with most hastily conceived reforms, it did a good job accomplishing what it was designed to accomplish, but in many ways, the cure has become worse than the disease. Basically, it has wiped out half the real estate value in the country, and has created a market in which the home building industry has been crippled, both by the inability to create new homes that appraisers can value correctly so as to facilitate mortgages for their customers, but also by giving the customers less capital to invest in a new home to meet the new standards in the mortgage industry.

The Dodd-Frank bill which passed last summer included provisions designed to correct some of the HVCC requirements which so catastrophically affected appraisals. These new guidelines, which were created by a task force consisting of 5 government agencies involved with real estate and consumer lending were complete about a year ago, and after vetting and approvals and whatnot were meant to have gone in to effect last April. They included such reforms as the mortgage makers being allowed to suggest comps to the appraisers, requiring the appraisers to be paid a going rate for their work, and requiring the comps used to recognize short sales and conditions present which adversely affect value. Seems pretty simple and logical doesn't it? I've been waiting for a resulting uptick in values , but as my example shows, it isn't happening. Why not?

Here's one example of the fallout. This is a house which was sold by one of my clients on a lot that he owned. It was a contract to build a home designed for a particular client. In this case, a tile distributor who finished out the inside with tile in nearly every room. This was done outside of the contract. As the house came closer to closing and being finished, it became apparent that it was not going to appraise for what the builder sold it for. The client was unable to complete his financing and eventually had to walk away from the deal, leaving not only his deposit, but a couple hundred thousand dollars of tile work inside. The builder has been unable to sell for what he has in it, and the bank refuses to release any more money to get the house to a point where it is salable. So there it sits for the past couple years. Contrast the example in the same subdivision. A similar product and circumstance. But the builder was able to complete the exterior, had a much easier time making a sale, and the home has been allowed to become a productive part of the community fabric.

Here is one where a builder actually was able to make a little bit of money. A realtor found an infill lot in a relatively decent area, but surrounded by 50 year old homes selling for the upper 100's. The plan was to put in a bilevel, not overwhelm the neighborhood, and watch the costs like a hawk building the thing. It was sold before completion for for the low 200's, allowing around a 30g profit. Looks easy but, a) you have to find the right lot and b) you have to watch your costs. Note this one kept overhead electric service, as the underground would have cost extra.

What has me worried is this economic angst is inevitably going to wind up stifling housing innovation. I have one house underway now where a young man, a single, is the client. His old house burned down, he got a check from the insurance company, and contracted for the house of his dreams, a total party house. The front has a sort of contemporary craftsman flavor, but the inside explodes around a prow to the rear with a deck overlooking a creek and some hills beyond. The master suite is all wide open with a tub in an alcove and a circular stair up to a library-office area. The downstairs is a huge barroom and media room. Not exactly the same program as the other family oriented homes in the neighborhood, but that's what adds interest. The priorities expressed here are not that unusual. The free spirited space allocation is much more in line with what other young people have expressed to me over the past couple years. The economic sanctions expressed by lending institutions are standing in the way of this sort of housing statement, which otherwise could be actively reflecting the lifestyles and choices of today's society.