WASHINGTON — Huge jumps in lumber costs for new houses nationwide during the past 120 days are beginning to disrupt one of the most important steps in buying and financing a home: the appraisal process.
Required by mortgage lenders to base valuations on comparable homes that have already sold, appraisers say they are unable to deliver appraisals at the price levels that builders need to make money selling newly completed houses.
Townhomes and detached models built in March carry lumber costs that can be $5,000 to $10,000 or more than identical units sold in January. But appraisers often can't--or won't--reflect those additional costs in their valuations for lenders. The net result has been that builders must either eat the difference--holding prices steady while reducing their own profit margins--or ask their home buyer customers to foot the bill through higher down payments or prices.
The appraisal problem has become so severe that one federal agency--the Department of Veterans Affairs--decided in late March to take the unprecedented step of urging appraisers across the country to "be flexible" in their valuations and to "consider" the effects of the recent run-ups in lumber prices.
From last October to March, the cost of framing lumber for new home building doubled--from $249 per 1,000 board-feet to as high as $506. Lumber suppliers and builders blame environmental restrictions on timber harvesting--particularly Endangered Species Act protections for spotted owls in California and the Northwest--as key contributors to the price explosion.
Environmental groups counter that excessive exporting of timber and fast-growing domestic demand are the culprits.
Whatever the causes, the price jumps have had dramatic effects on new home construction at every level of the market, especially in the first-home sector.
In metropolitan Atlanta, for example, Homeland Communities builds subdivision townhomes and single-family detached houses priced in the $50,000 to $120,000 range. According to vice president Neil Hughes, the cost of lumber the firm uses to build its homes has risen by $4,000 to $7,000 per unit, depending on the model and size. The increases have affected nearly every use of interior and exterior wood, he said, including trusses, the framing package, siding and cornice package, deck, batter board and interior trims.
"It's the identical home," said Hughes, "but if I want to make a reasonable profit on it, I've got to raise the price by $5,000. But appraisers won't give us $5,000 (in higher valuation) because they see that the only comparables they've got are the units that closed a couple of months ago for a lower price."
Customers "are being blown away" by the situation, according to Hughes. When a house priced at $105,000 is appraised at $100,000, the mortgage lender will only apply its underwriting ratios to the appraised amount, not the builder's price.
A 90% loan-to-value ratio on a $105,000 house permits a maximum mortgage of $94,500. If the same house appraises for only $100,000, however, the maximum mortgage drops to $90,000. The $4,500 additional "is a deal breaker," said Hughes. Buyers simply don't have the money. If the builder doesn't lower the price, the customers usually walk--an experience Hughes' firm has faced increasingly when it refuses to bear the full burden of the increased lumber costs.
The problem, say real estate appraisers in their own defense, is essentially a "Catch 22." If they follow the underwriting standards required by most institutional lenders, they must look to the most recent completed sales of similar units in the subdivision as their guide to current market value. If they try to add on higher component costs dollar-for-dollar--with no closed sales to back them up--they could leave lenders exposed to future losses.
Short-term fluctuations in materials costs--even as large as the recent run-ups in lumber prices--can't be given special weight, appraisers argue, because the same materials prices could drop again, just as fast.
"I truly sympathize with the builders," said Ken Nicholson, an appraiser specializing in new subdivisions in the Kansas City metropolitan area. "They need higher appraisals to reflect their higher costs. But I tell them, look, your argument isn't with me. My instructions are to look at closed sales, and that's what I have to do."
Officials at the National Assn. of Home Builders (NAHB) say the problem won't go away until the Clinton Administration takes positive steps to increase timber harvests. Kent Colton, executive vice president of the group, wants the White House to remove current import duties on Canadian lumber, allow greater harvesting of dead or dying trees on U.S. Forest Service tracts, and to allow "moderate" harvesting in forests where endangered species restrictions currently prevent logging operations.
Builders received one bit of good news in late March, when the Veterans Administration said it would instruct all appraisers active in VA-approved new home subdivisions to give "consideration" to pending but unclosed sales contracts on newly completed homes that reflect higher lumber costs.
Keith Pedigo, director of the VA's home loan guaranty service, said: "We want to be helpful in this situation, and we think our rules permit it." In other words, if a builder has a $108,000 pending sales contract on a unit that sold for $100,000 before the lumber price explosion, a VA appraiser may well be able to appraise it at or near the $108,000 contract level.