Appraising the Home Appraisers

Susan Wachter is a professor of real estate at the Wharton School of the University of Pennsylvania.

Why are home appraisals so crucial to the home-buying process? Real estate is the most important asset in terms of share of worldwide assets. It's the largest asset class. But real estate is unlike other assets that trade continuously, such as stocks, which can be priced from the market. Real estate is local, and properties are idiosyncratic. You're not going to learn what the price is from the market. Besides, a property may not have traded for several years. You need to have judgment in the valuation process.

What part did appraisers play in the most recent housing debacle? There's always pressure for appraisers to "hit the number," but in this past cycle it became extreme. There are many stories of appraisers pressured to certify that the price a buyer was willing to pay for a particular property was what the property was actually worth.

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Isn't it? Appraisers shouldn't simply rely on whatever a buyer is willing to pay. They have to look at comparables -- genuinely comparable properties -- that show that the price a borrower is willing to pay isn't an outlier. But then there's the question of what is a comparable. When a wave of low-cost financing comes to a neighborhood suddenly, you have a lot of comparables. That's the limitation of appraisals.

Have reforms been put in place to ensure that appraisals are on the up and up? This isn't the first time a real estate bubble brought the system down. After the savings-and-loan crisis, appraisers were required to be licensed, and uniform standards were adopted. One problem is that the response to a violation might be to take an appraiser's license away -- that's very draconian, so appraisers are hesitant to penalize their own. Self-regulation can't be the entire solution. Banks and mortgage brokers must have an incentive not to push deals that don't work in the long run.

What can home buyers do to ensure a fair valuation? The appraisal is not meant to identify the right price for the borrower. The appraiser's responsibility is to tell the lender whether to make the loan. Buyers should do their own due diligence and find comparables in the local market.