Risk Of Overappraisal Increasing As Prices Slow

When prices are changing rapidly — whether they’re going up or down — there’s always a risk of appraisers not being able to catch up. Most of the data available to appraisers is at least a week old, usually a few weeks. Most of the time, this is good enough, but not when price fluctuations are happening quicker than that. It’s expected that prices will be dropping rapidly throughout 2023 and 2024, which increases the risk of overappraisal. This is especially harmful to buyers who may end up paying more than the home’s actual value, immediately falling into negative equity. Lenders also want to avoid this, since they can incur losses when lending to a buyer who is suddenly in debt.

It’s not an issue that can be eliminated entirely, but luckily, there’s a way to at least mitigate it. In 2007, Fannie Mae encouraged appraisers to start including an assessment of the current market direction. Since 2009, oversight for appraisals is not handled by Fannie Mae but rather by appraisal management companies, but its still good advice. It means that even if the appraisal is off by a bit, involved parties will know in what direction the error is likely to be and can plan accordingly. Fannie Mae suggests that the assessment be limited to the neighborhood of the property in question and include data on recent price changes, average days-on-market, and inventory.

Photo by Paul Volkmer on Unsplash

More: https://journal.firsttuesday.us/the-danger-of-high-appraisals-in-a-spiraling-housing-market/88193/