Problems with a Reactive Versus a Proactive Housing Market
How the Home Buying Process Works
The home buying process seems like a fairly straightforward idea. The sellers and their agent reach an agreement with the buyers and their agent. Since agents study the local real estate market, it is assumed that the asking/selling price is on target. The bank then comes in via the appraiser to make sure the value of the home is sufficient to off-set the bank’s risk of the buyers defaulting. If all adds up, the deal is done. Every party has a vested interest in making the deal work because no deal equals no money for anyone. For many years appraisers were under pressure to find enough value to justify approving the loan. This added to inflated home prices over the last 20 years. To deepen the problem, easy credit allowed more people to enter the market driving up demand and sending home prices soaring. Appraisers had to find more and more value to make the deals work. Everything seemed fine as long as everyone agreed on the value and kept paying for it.
A Self-Defeating Prophecy
For many years, the role of the appraiser was just assumed in the home buying process. There seemed to be so much value in homes that the appraiser’s only job was rubber stamp the deal that was already done. What many failed to realize was that banks and their appraisers created that perceived value; that is until the market collapsed. With all of those ill-equipped new homeowners defaulting on their mortgages left and right, home values plummeted. The house of perception the banks and their appraisers built came crashing down. To make matters worse, an economic downturn drove people from their jobs and, consequently, out of their homes. Lower home values also meant little or no equity. When it came time for all the marginal homeowners to refinance to cover their balloon style mortgages, the cupboard was bare. They defaulted, too.
Those Who Study History…
The immediate reaction by mortgage companies to the housing market collapse was to tighten credit. They pulled in the reins so much that almost no one who needed money could get it. This seemed like a justified reaction given the magnitude of the financial earthquake shaking the nation. One problem with looking back too long is that the economy doesn’t move forward.
A Self-Defeating Prophecy, Part II
The role of appraisers now has become one of defender of the bank. They seem to have swung too far the other direction and are being reactive to the crisis the same way they were reactive to the greed that caused it. The truth remains that no deals equal no money for anyone. The appraisers are so consumed by protecting the bank against defaults that they are missing the fact that this tight fisted approach is hindering any recovery effort in the housing market. Nobody qualifying for a home loan is just as damaging as everyone qualifying.