Advancements are for the better of the industry, says executive
A bumpy ride for home prices across the US in recent years has brought the home appraisal process into sharp focus – but a narrowing gap between sales prices and appraisal values could signal a return to a more stable housing market.
As mortgage rates began to jump and the housing market cooled, the percentage of homes being appraised below sales price ticked into double digits (10.7%) in June 2023. Still, that had slid to 8.6% by the same month this year, suggesting buyers and appraisers were increasingly on the same page about the actual value of a home.
The unpredictable housing market served as a further complication to the work of appraisers, who had already seen their ability to assess properties in person thrown into question by the events of the COVID-19 pandemic between 2020 and 2022.
However, the innovation and adjustment borne out of that “pretty invigorating” couple of years for the appraisal industry suggests it’s in good stead to navigate future challenges, according to a leading executive.
Kenon Chen (pictured top), executive vice president, strategy and growth at Clear Capital – a solution provider for real estate and mortgage professionals – told Mortgage Professional America that better data up front, as well as more objective and accurate models, had helped push the appraisal process forward from where it stood in years gone by.
That’s been a natural gravitation away from outdated methods of the past. “Appraisal has been scrutinized more over the past few years than in quite a while, but I think, at the heart of it, it’s really about moving the process from what’s been an analog process – it’s been very paper-based, very forms-based – to the modern era where we look at more of a data-first approach,” he said, “with the goal of making the results more objective, consistent, accurate, or fair.”
What was the catalyst behind improvements in appraisals?
Scrutiny of the appraisal process has been an accelerant to change – but Chen said it’s too convenient to attribute that to the turmoil of the pandemic, when public health restrictions and stay-at-home measures created a slew of new challenges for appraisers.
Efforts to address shortcomings had already been in play. “The timing was interesting because it was really the refi boom that happened in 2016 that drove the need to look for a different approach,” he said. “It was the time of Brexit, and we had rate drops, and a number of refis happened.
“And that created capacity constraints in appraisals at the time – especially in the Pacific Northwest. There were six-to-eight-week delays to get appraisals back. There were families that were stranded in hotels, in between properties, and we all kind of looked at each other and said, ‘There has to be a better way’.”
Development of a uniform property data set by Fannie Mae and Freddie Mac helped a credible opinion of value to be built, allowing a workforce other than the appraiser to visit a home and bring data back, while digital advancements mean the property can be captured digitally and may generate an accurate floor plan and measurements.
Will the appraisal picture continue to improve next year?
The question of what’s in store for 2025 is one that remains difficult to answer, with mortgage rates expected to gradually decline further but remain significantly higher than their pandemic-era lows.
After a tough period for home sales, the National Association of Realtors (NAR) has forecasted that the housing market will stabilize in the coming years, with a projected increase in home sales for 2025 and 2026 as mortgage rates level out.https://t.co/E4v8YeHLpw
— Mortgage Professional America Magazine (@MPAMagazineUS) November 11, 2024
The continuing existence of plenty of pent-up demand on the sidelines means home prices are likely to see broad appreciation, according to Chen, with supply continuing to lag behind what’s needed.
Meanwhile, the fact that plenty of Americans locked into record-low mortgage rates in recent years means they’re unlikely to want to let go of their first liens – “and so it has really brought in continued opportunity for home equity products and home equity loans to keep improving those options as well,” Chen said.
“We’re seeing a lot more adoption and use of automated valuation models [AVMs] to support second-lien decisions, and so the importance and responsibility on AVM creators to create accurate models that support these types of decisions is [set to become] more important through next year.”
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