Artificially Inflated Prices Add To Woes
Ben Jones of "The Housing Bubble 2" beat me to the punch on this story (how does he make so many posts each day?), but since it was reported by a local outlet (KING 5), I thought it would be good to post here. It really isn't a particularly local story (except for one local example), but it is still interesting:
Owning a home in western Washington is like sitting on a gold mine these days, but how do you know what your home is really worth? Appraisal experts and consumer advocates alike are now sounding an alarm about a startling problem that could have you borrowing more than your home's actual value.As if homes around here aren't already expensive enough without having to worry about this sort of thing.
When an appraiser overvalues a home that can lead to an upside down mortgage where you end up owing more than the property is worth. "This is a major problem," says David Callahan, with an advocacy group called Demos that recently looked into just how widespread the problem is.It all comes down to one thing—greed. Greed, greed, greed.
Callahan says research shows the numbers are staggering. "More than half of appraisers say they have been pressured to inflate the value of a home." Mostly they have been pressured by mortgage brokers and lending institutions, according to Demos' study.
(KING 5 News, 08.22.2005)
8 comments:
Not to mention a sky-high property tax bill!
You can bet one of the reforms after this mess is over will be to change the appraisal system. Right now they're just short of being wh*res. Perhaps mortgage companies will have to use appraisers based on a mandatory rotating system with no second appraisals allowed.
Anonymous:
I guess I'm not seeing how appraisers are the problem... There job is to appraise the value of the property based on what someone else would be willing to pay for it. If they were wrong (on the high side), I would think that the market would correct itself unless others were willing to pay this higher price for a home, in which case they were right that the property should have been valued higher. I guess it could be argued that they are creating a self-fulfilling prophesy, but I'm going to assume that you aren't the type to argue *against* the merrits of a market-system (capitalism).
Most of the homes that I see selling on the market are going for over the county's appraised value. Granted, the appraisal I'm talking about is done by the local government, and I think you have a problem with the contract appraisers...
Maybe you're expecting appraisers to add some type of "bubble factor" to their equations (as oppose to just looking at comparable houses). In other words, their reports could say, "Comparable homes in this neighborhood are selling for $400K, but I think the bubble is going to burst in a few months/years, so even though others have proved that they are willing to buy a similar house at $400K in today's market, I think the house (and land) should only be valued at $370K." I'd be quite surprised if you cannot see the ridiculousness in that statement.
I guess I'm not seeing how appraisers are the problem... There job is to appraise the value of the property based on what someone else would be willing to pay for it.
Ok, here's one problem I see: In a booming market, where values are constantly changing, the average homebuyer doesn't have a good sense of values. If an appraiser says a house "worth" $750K last month is now $800K, how does the average homebuyer question that? I'm talking about appraisers working with realtors and banks--any motive there to appraise high? Of course, another factor here locally are the multiple bid wars, driving prices even beyond the listed "value". I'd attribute this largely to flippers and other speculators, which is the main cause of the RE overvaluation--not appraisers.
It sounds like we agree for the most part that the appraisers play only a minor role (at best) in the high prices. And I’d definitely agree with you that nationwide flippers and speculators are definitely fueling the high prices in some markets… but that isn’t happening here in Seattle. It seems that in Seattle (and nearby communities) the type of people bidding on properties fall into one of two categories: Home buyers or Investors. In the residential market, the bidding wars are almost always between home buyers (For example, I can’t think of one example of a house having been flipped in Ballard.). The only short-term buyers I see are people who are buying up tear-down houses and fixing them up with the intention of making a profit (but I would not consider these people to be flippers or speculators as they are adding substantial value to the home at a risk that they are willing to assume). The other side of the equation is that there are a lot of young tech employees (i.e. “Microsofties”) in the area with a lot of money who are buying up properties with the intention of finding a smart place to put a lot of money. My conversation with these investors indicates that they are in the market for the long run and they are willing to accept a temporary loss due to low rents on their property for the opportunity to park their money in a good long term investment at a low interest rate. Again, these people aren’t flippers or speculators as they are in the market for the long run. And more importantly, this massive amount of disposable income on the part of tech employees is not going anywhere as many locals continue to accumulate massive amounts of money in the form of stock and stock options. I give this background to make the point that there are a lot of factors driving up home prices in Seattle (quite possibly to unsustainable levels!), but flippers, speculators and appraisers are playing almost no role in this process.
Tim: Apologies for posting outside of the Seattle region but since you started it...look at these YOY increases. This is insane.
Sacramento houses stay red hot; West Sac's turn white hot
http://tinyurl.com/8quoz
...The only short-term buyers I see are people who are buying up tear-down houses and fixing them up with the intention of making a profit ..
It's interesting to hear that "flipping" is less prevalent up there--no waterfront condo flipping? Anyhow, the definition of flipping here also includes scenarios like this: Buy old home in "hot" area for $1M, scrape off existing house, build new house for $750K, then sell for $2.7M (a real example). For some reason, we call that flipping too, because of the quick turnaround, and the high "value" in a neighborhood that's otherwise in the $850- $1M range. This sort of speculative building tends to inflate value and crowd out homebuyers because once such a "flipped" home is sold, it attracts other flippers to bid in the area (bidding war), which drives up prices. Imo, anytime multiple people buy, intent on quick and fast profits, it really skews the valuations. Of course, the real trick can be selling a $2.7M home in such a neighborhood--essentially moving it out of the local market. If it's sold while "hot," perhaps it's "worth" that. If the market flattens, and it sits for 6 months--oops! Of course, people who gradually improve their homes with the intent to eventually sell is part of normal upgrades seen in well-maintained neighborhoods.
Just one example here (SF Bay), and glad to hear it's less prevalent around Puget Sound. I used to live there, and I hope this "bubble" doesn't ruin things for everyone.
How's this for a definition of "flipping": Buyer1 gets house for $180. Spends 30,000 putting in new kichen counters, windows and a coat of paint. Sells house within 6 mos. for 350?
I saw this happen many times in North Seattle in the late 90's.
I think half the reason reports say that Seattle is only 25-30% or so overvalued is because they ignore the fact that RE prices doubled BEFORE 2001 around here.
Wow Anon, are you ever right!
Wasn't it around '96 that that happened? Or was it '98? An instant doubling of prices over one summer. Terrifying.
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