With home developers resorting to lotteries to pick their lucky buyers, and with brokers' inventories of unsold homes shrinking at a dramatic rate, no one can seriously challenge the argument that the dramatic plunge in mortgage interest rates has the current real estate market "coming up roses."
Roses complete with at least one "thorn'--a thorn that reaffirms the validity of Murphy's Law: "whatever can go wrong, will go wrong."
And what's wrong with today's real estate market, realtors say almost unanimously, is that appraisals of market value are coming in so low--unrealistically low in their opinion--that deals assumed to be as good as closed by buyer, seller and realtor, are dropping like flies.
Logically, that is, a would-be buyer prepares himself for a down payment that will reflect 20% of the sales price of his new home. In the instance of a $180,000 house, he assumes that the appraisal will come in at about $180,000, that the lender will loan him the 80% balance, or $144,000, and that he will have to come up with $36,000 for the down payment.
If, instead, the appraisal comes in at $160,000, that's the figure the lender uses in determining his 80% financing ($128,000) and, unless the seller scales down his asking price, the buyer faces a down payment of not $36,000, but of $52,000, and an appraisal 11.1% under expectations that results in a down payment requirement 44.4% above expectations.
"Appraisals traditionally come in a little bit low so the appraiser can cover himself, but not enough to blow the deal," according to Realty World's Joe Veigel in Long Beach. "If it's a couple of thousand low, it's no problem, but I've got any number of transactions in escrow right now, and I'm very concerned about every one of them."
And while Paul J. Joseph of Sherman Oaks, president of the Southern California chapter of the Society of Real Estate Appraisers, concedes that "there are always cases where realtors may have a problem with an appraisal--it's been that way since the Year One," a survey of local realtors suggests that, far from being an occasional, isolated difference of opinion, the current gap between prices being asked for real estate, and the appraisals being returned on them, is pervasive.
"It's a problem, all right," Joel Singer, the California Assn. of Realtors' director of research, said, "And I'd like to hope that time will solve it because we've had it before, but there's no certainty in that hope."
The "why?" of it is a jumble of freakish timing, coupled with cumbersome, time-consuming mechanics; personnel shortages, and regulatory and traditional constraints on the appraisal process. And, hanging over it all: the ghost of past mistakes, and a sort of Catch-22 situation where both realtors and appraisers agree that a closer cooperation between them could sharply mitigate the problem--but which both back away from.
The taproot of the problem itself isn't under debate: A real estate market that has rapidly turned around since the first of the year and an appraisal industry--strained by the demands on it--that is working with "comparables" that are at least four to five months out-of-date and that don't reflect the present realities of the market.
"Appraisers, like economists," the CAR's Singer said, "frequently miss the trend, either going up or coming down. And they've been slow in realizing that the market is heating up, particularly in Southern California. Prices in the first quarter of this year are at least 10% above those in the same quarter of last year. And the appraisals coming through today are clearly understating prices that are actually being obtained in legitimate transactions."
"In the Fairfax area," according to realtor Ben Lesser who, until he sold out to Merrill Lynch Realty last year, headed his own brokerage, "we've got about 200 transactions on our computer but when you print them out, you've only got one closing showing that's as recent as this past February.
"The other closings go back to the end of last year, and they show properties selling in the $170,000 to $190,000 range that today are fairly priced at $230,000 to $240,000. And, if they come in with an average appraisal based on those end-of-'85 closings, they're going to come in way low.
'Definitely in Up Market'
"I've got a meeting with an appraiser in about an hour, and I simply don't know what I'm going to show as comparables."
And realtor Fred Sands noted that "you've got appraisers who are looking at a data base of depressed real estate sales --a 'worst' market scenario--instead of what's actually going on now. We're definitely in an up market and there's simply no question that prices have moved up and that there's a tremendous amount of activity going on out there."