It’s no surprise that the nation’s sluggish economic recovery may be slowing down the housing market (and visa versa). But Realtors in Colorado and elsewhere around the country are reporting that mortgage financing and appraisal hurdles are increasingly playing a major role in knocking deals out of escrow and holding back the housing market’s turnaround.
Time magazine reported that 16 percent of all sales contracts failed in July because the buyers could not secure a mortgage, according to figures from the National Association of Realtors. In other words, one out of every seven contracts is going down due to problems that buyers are having getting mortgages. To look at it another way, writer Alison Rogers says, there are tens of thousands of people who are trying to buy homes but can’t because they’re denied a loan.
In her article, Rogers – a Manhattan Realtor and founding editor of the New York Post’s real estate section – concedes that it’s possible that the system is doing its job, and that those denied buyers shouldn’t get loans. “Maybe they’re poor credit risks, or their employment isn’t stable, or they’re trying to overpay for their target properties,” she said. “But I doubt that’s the only thing going on because the percentage of denieds spiked so suddenly, from 4 percent in May to 16 percent in June.”
While July turndowns are steady from June, it does look to Rogers like that quadrupling earlier this summer reflects that, “a credit spigot was shut off very, very suddenly.”
Cash purchasers, on the other hand, haven’t fled the market. Some 29 percent of July sales were all-cash transactions. NAR reports that “the bulk” of these are investors. “Those with means, it appears, still believe in housing, perhaps lured by the slump’s relative bargain pricing. (Or they’re fearful of the daily rollercoaster of the global equities markets),” the Time article noted.
Difficulty in securing financing isn’t the only hurdle buyers are facing today. Local Realtors are reporting that surprisingly low appraisals are preventing many sales from going through. Colorado agents aren’t the only ones who are experiencing this issue. The Wall Street Journal, in a recent front-page article, noted Realtors all across the country are running into the same problems.
According to the Journal’s reporters, real estate appraisers, who were criticized by some for being too generous in their property valuations before the housing market fell, may be going overboard in the other direction.
“One of the conclusions from the housing bust: The appraisal system was broken,” the Journal said. “One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way. There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. But some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.”
The Journal said some real estate professionals believe that lenders are pressuring appraisers to come in with lower estimates. Banks also are using less-experienced appraisers, who often don’t appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.
Lenders are “instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem,” Columbia Business School economist Chris Mayer told the Journal. A research paper last year titled “How Much Is That Home Really Worth?” by economist Leonard Nakamura at the Philadelphia Federal Reserve, cited a downward bias in appraisals.
In talking with agents around Colorado, I’ve heard many anecdotes about sales being slowed down, renegotiated or even lost due to appraisal and mortgage financing issues. It does seem to be happening more and more these days.
While it’s important for lenders and appraisers to be cautious and prudent given the problems of the past, they also need to be reasonable in their approach and make sure that the pendulum hasn’t swung too far in the other direction. The recovery of the housing market is too important to throw more hurdles in its path.
