Appraisers Are Preventing a Recovery

As you all know, I am not one who has a vested interest in inflating property values. Matter of fact, I was sounding the alarms when I saw bogus "name your price appraisals" come across my desk whenst I was in the banking industry.

However, today the pendulum has swung to the other side and not just the other side, but to just as much of the extreme as when prices were outrageously high. For when I had my house appraised recently, not only did it come in below what I was expecting, but so low that I literally laughed at it. Not only because I would never sell it for that, not only because the LAND alone (in my humble opinion) was worth more, but because the rental income I generate alone would be 50% MORE than what a mortgage would be to finance it 100% for that price.

So let me explain to you what is going on.

First of all you must understand that the appraising industry which is a VITAL part of this economy (as it conveys price information to the market about the largest single asset people own - THEIR HOMES) is occupied by nothing more than 100%, grade A, morons.

First they would whore themselves out to whoever would pay them the most to "deliver" the price the borrower or the bank needed for the deal to go through back during the bubble days.

Now they're just engaging in CYA.

So you're not dealing with brilliant people, you're just dealing with people who go where the money is.

Second, because of their stupidity the problem is that they're not doing their job and that is ACCURATELY APPRAISING PROPERTY. The problem this presents is that it stunts or at least mutes part of the "stimulus" plan in that while (presumably) all this TARP money and bailout money was to be used to help provide low interest rate loans so the masses could refinance at lower rates and thus improve their personal finances, it's never loaned out because why????

Oops! Sorry, your house appraisal came in too low. We can't refinance.

(Never mind that in some cases if the banks don't refinance they'll end up foreclosing and repossessing a house that is less than what is owed to them and it would be in their best interest to refinance, but, eh, banks are even more moronic than the appraisers)

Regardless, the whole point is that while people would like to refinance, they would like to save money, and we would like to get this economy back on the road again, the appraisers effectively prevent this with their insanely low appraisals.

Now I know why this is happening, for whilst my days as a credit analyst, part of my job was to audit these appraisals. And to understand why your house is "worth" only 50% of what it was before and why you were shot down for the loan and the bank is now going to repossess a presumably worthless property, you must understand the three appraisal techniques.

First there is the cost approach. This basically states the value of the home is the amount it costs to build it.

Then there is the income approach. This is like a "discounted cash flow" approach to valuing property. It theorizes if it was rented out what kind of value would those cash flows give the property.

Then there is the all important "sales comparison" approach. This takes sales of similar properties in similar areas and then applies similar prices to your property.

And that is the approach where the problem lies.

For you see, appraisers take RECENT sales. The problem this presents is that "What if you were in a bubble?" Or conversely, "What if you were in the worst housing market ever?" When housing, and the mortgages used to finance it, are presumably long term assets.

Understand the problem this presents when trying to value properties.

If you valued on property based on the sales approach 3 years ago, it would be overvalued.

If you valued it today (I'm getting the feeling) it would be undervalued due to the majority of sales being foreclosures.

But the bank has typically a 30 year mortgage on it, and you would plan to live in the home for more than 5 years.

This means the value of a home shouldn't be based on the current, minute to minute market fluctuations in home prices, but rather a long term rolling average.

But, of course, again, try to tell that to appraisers or explain that to banks. And you'll see why we have to bail out the banking industry and while the appraisal industry, vital as it may be to our entire financial system and economy, is nothing but a bunch of lemmings.