Thursday, June 25, 2009

Low Appraisals Threaten U.S. Property Rebound by Cutting Prices -

By Dan Levy

June 24 (Bloomberg) -- There may be another culprit scuttling a U.S. housing recovery: low home appraisals.

Flawed appraisals are derailing real estate sales and depressing values across the U.S., the National Association of Realtors said yesterday as it reported that existing home prices declined 17 percent in May from a year earlier.

“It’s pointing to thousands of delayed or canceled transactions,” Lawrence Yun, chief economist of the Chicago- based Realtors group, said in an interview. “We’ve had a massive inundation from members saying this is a big problem.”

Appraisal rules that went into effect on May 1 require lenders that sell loans to Fannie Mae or Freddie Mac to set up a firewall between appraisers and loan officers to prevent improper influence. The rules are the result of an agreement between the mortgage buyers and New York Attorney General Andrew Cuomo, who said an investigation found appraisers inflated values under pressure from lenders.

The agreement mandates that banks order a second appraisal on 10 percent of the loans they sell to Fannie Mae and Freddie Mac, and warns against accepting the higher of any two valuations. The guidelines have led to more conservative valuations by many appraisers and a “chill” in lending, according to John Brennan, research director at the Appraisal Foundation, a Washington-based trade group.

‘Unintended Consequences’

“Sometimes policy can lead to unintended consequences,” Yun said.

Cuomo said in December when the appraisal agreement was reached that the deal “preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest.”

Alex Detrick, a spokesman for Cuomo, didn’t immediately respond yesterday to a request for comment.

When home values come in below the sales price, that’s not the appraiser’s fault, it’s a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement yesterday.

“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” the group said. “That mentality helped cause the mortgage meltdown to begin with.”

More deals are falling apart in a housing market that needs transactions to recover from a three-year slump that has dragged the U.S. into a recession. Low appraisals join a list of suspected obstacles standing in the way of a rebound that includes rising interest rates, a glut of foreclosed properties, and the highest unemployment rate since 1983.

Sales Fall

Sales in May were 3.6 percent lower than a year earlier, the Realtors said yesterday. U.S. home prices fell 6.8 percent in April from a year earlier, the Federal Housing Finance Agency said yesterday in Washington.

The number of houses on the market dropped 3.5 percent to 3.8 million in May, NAR said. At the current sales pace, it would take 9.6 months to sell those homes, compared with 10.1 months in April.

Real estate broker Vince Saragosa had a $185,000 offer in April for a three-bedroom home in Royal Oaks, Michigan. An appraiser valued the property at $128,000 and the deal fell through.

“It’s almost like appraisers are interfering with the market,” Saragosa, owner of World Showcase Realty in Shelby Township, a Detroit suburb, said in an interview.

Deal Collapses

California real estate investor Bruce Norris renovated a three-bedroom home in the Riverside-San Bernardino metropolitan area in January and found two buyers willing to pay $165,000. An appraiser put the value 15 percent lower. The prospective purchasers walked away and now he’s renting the house instead.

Low appraisals that lead to a sale reduce comparable prices in a neighborhood and make it “impossible for another group of people to refinance,” Norris said.

“Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk,” the Appraisal Institute said in its statement. “However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes the markets don’t act like we want them to or hope they will.”

Cuomo, a Democrat elected three years ago, sued title company First American Corp. in November 2007, accusing its appraisal unit of inflating home values under pressure from Washington Mutual Inc. JPMorgan Chase & Co. bought WaMu’s deposits and branches in September after the Federal Deposit Insurance Corp. took over the company.

Cuomo Probe

The lawsuit followed an investigation that Cuomo said showed conflicts of interest between appraisers, credit rating companies, lenders and investment banks.

Artificially high appraisals contributed to record foreclosures because borrowers ended up owing more than their houses were worth. Now, critics say, low appraisals are hindering sales.

“When prices are down, appraisers tend to depress values because they don’t want to look bad in front of the lenders who are ultimately hiring them,” said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York, an investment advisory firm specializing in fixed income and real estate. “They over-extrapolate the current psychology.”

Trade groups including the Mortgage Bankers Association and the Appraisal Institute opposed the agreement with Cuomo because they say it was written without industry input and harms relationships between “reputable and ethical” mortgage brokers and appraisers.

Flawed Guidelines?

The U.S. Office of Thrift Supervision last May called the deal “flawed” and said it should be reconsidered. The Federal Reserve said it should be scrapped in a June 2008 letter to the Office of Federal Housing Enterprise Oversight, now called the Federal Housing Finance Agency, that oversees Fannie Mae and Freddie Mac.

In the first quarter, loans eligible for purchase by Fannie or Freddie account for 70 percent of all lending, according to newsletter Bethesda, Maryland-based Inside Mortgage Finance.

“Just as the lack of careful regulation led to inflated prices, the return to regulation is reinforcing the downturn,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “It’s making the cycle worse.”

To contact the reporter on this story: Dan Levy in San Francisco at

Last Updated: June 24, 2009 00:01 EDT

Friday, June 12, 2009

Investors not flipping houses, but renting

by J. Craig Anderson - Jun. 12, 2009 12:00 AM
The Arizona Republic

Real-estate investors have returned to the Valley in a big way, prompting concerns that the housing market is becoming too speculative to sustain the recent buyer activity.

The lure of once-in-a-lifetime deals on bank-owned homes is driving investor purchases, which experts say account for 50 to 70 percent of recent home-buying transactions. Still, it's the ability to generate revenue by renting the homes to tenants - in some cases, previous owners - that makes the properties such attractive investments.

The Phoenix-area housing market has been flooded with homes for rent in recent months, raising concerns about whether there will be enough tenants to keep the Valley's estimated 130,000-and-growing rental properties out of financial jeopardy.

Even some longtime supporters of the home-investment market say they've noticed a disturbing return of the can't-lose mentality that got so many speculators and house-flippers into trouble a few years ago.

"Investors are starting to look at the market from a speculative standpoint," said Alan Langston, who runs the Arizona Real Estate Investors Association. "We could end up with an oversaturated rental market."

Although the demand for rental homes is still strong, Langston said, speculators seeking big returns could be in for an unpleasant surprise, especially if they don't treat rental-home ownership as a business that requires time, effort and cash reserves.

Dealing with tenants also requires legal knowledge, he added. "You need to have a good lease, and you need to know how to enforce it," he said.

Langston has created a second organization, the Arizona Rental Property Owners and Landlords Association, to provide resources such as proper lease agreements, market data and legal advice in exchange for an annual fee of $129.

Rental-home owners who lack a full understanding of the financial risks and recommended precautions could find the homes they purchased from lenders right back on the market, which would be bad for investors, tenants and the area's economic recovery.

Home foreclosures have created an atypically high demand for rental properties, but that demand is not unlimited, and rental investments are not immune to financial risks such as tenants losing their jobs or continued decline in rental rates as supply increases. The glut of single-family homes for rent, overbuilding of apartments and failed condominium projects have created a difficult and highly competitive market for rental-property owners.

Many apartment managers have responded by boosting incentives such as lower rents, waived or reduced fees and complimentary services.

Many rental-home investors have purchased the properties with cash, which means there is little chance of those homes going into foreclosure. Of the estimated 131,000 rental homes in the Phoenix area, only about 5,000 are currently in the foreclosure process, according to Valley market-research firm NetValueCentral Inc.

Langston said it's likely that many of the houses in foreclosure are owned by what he calls "reluctant landlords," people who were forced to leave their homes and rent them to tenants because of financial problems.

But whenever there is a perceived opportunity for investment gains, he said, it will attract what Langston calls "stupid money." Stupid money was flowing like water during the housing boom, he added.

"The idea is that you could make money even if you didn't do anything right," he said.

Chaz Smith, senior vice president of the LandSource Group at Colliers International in Phoenix, said first-time buyers in the current market are all too aware of the investor presence.

"Young people looking for a starter home, they get outbid by investors," Smith said.

Still, Smith and Langston see real-estate investment as a positive. The competition that's causing frustration for other buyers is keeping prices from falling further, they said. Starter-home buyers alone would not create enough demand to absorb the supply of bank-owned homes coming on to the market each month, they said.

Investors have fixed up many dilapidated or trashed homes and prevented the Valley from having neighborhoods littered with abandoned properties.

"Homes are being bought, neighborhoods are recovering," Langston said. "Imagine this market today without investor activity."

However, he said, there is a big difference between an investor and a speculator.

"Investors follow solid investment practices. They add value to the transaction," Langston said. "Speculators are looking for a very quick turnaround and a very large return."

Despite the economic benefits of investor participation in the market, some observers say, the return of investors - even responsible ones - has disturbing moral implications.

Jim LaVanway, vice president of Homeowners Financial Group in Phoenix, is among those who blame the investment community for creating a bubble in the first place.

"That's the irony of it," he said. "Now, we're waiting for those same guys to come back and buy those same homes at a lower price."

Too many rentals?
Investors' rush to purchase bank-owned homes and turn them into rentals has sparked a number of concerns, including:

• Too much supply: Rental properties would put many apartment and rental-home owners out of business.

• Future concerns: The failure of rental investments would lead to future foreclosures and displacement of families. Also, a high number of rental-investment failures would scare away other potential investors and decrease home sales.

• Homeowner appeal: Neighborhoods overrun with rental properties would be undesirable to prospective homeowner-occupants.

How I see it in the trenches here on the front lines. Arizona Real Estate/Rental Market Update.

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