Appraising the Home Appraisers
They're supposed to be the market's gatekeepers. But who are they really working for?
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.
-
Markets Post Broad-Based Gains Thanks to Mega-Cap Tech
Stocks get help from a couple of laggard Magnificent 7 stocks.
By Dan Burrows Published
-
How to Assess the Impact of Your Charitable Giving
Here are five simple ways to 'do this, not that' when trying to find out from a nonprofit what kind of impact your donations are having.
By Catherine Crystal Foster Published
-
Best Foreclosure Sites for Finding Properties
Making Your Money Last Wondering how to find foreclosed homes for sale for your next residence or to flip for a profit? These websites will guide you to foreclosures and real estate-owned properties to buy.
By Bob Niedt Last updated
-
Luxury Home Prices Rise as the Rich Dodge High Mortgage Rates
Luxury home prices rose 9% to the highest third-quarter level on record, Redfin reports, growing nearly three times faster than non-luxury prices.
By Kathryn Pomroy Published
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
5 Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Rates are high this year, but you can still find an affordable loan.
By Daniel Bortz Published
-
Looking to Relocate? Plan for Climate Change
buying a home Extreme weather events are on the rise. If you’re moving, make sure your new home is protected from climate change disasters.
By Rivan V. Stinson Published
-
Retirees, A Healthy Condo Has a Flush Reserve Fund
Smart Buying Reserve funds for a third of homeowner and condo associations have insufficient cash, experts say. Here are some cautionary steps you should take.
By Patricia Mertz Esswein Published
-
Cash Home Buyers: New Services Offer Help Making All-Cash Offers
Becoming a Homeowner Some firms help home buyers make all-cash offers on homes. Weigh the fees before you sign on.
By Emma Patch Published
-
Home Sale Prices in the 50 Largest Metro Areas
Becoming a Homeowner What’s happening in the market where you live?
By the editors of Kiplinger's Personal Finance Published