The euphoria that gripped the residential real estate circles over the last six years appears to have finally been extinguished as of yesterday. Now even NAR admits that housing prices are going down. Prices are going down, even in nominal terms, let-alone in terms of cash to the seller. In terms of the USPAP definition of Market Value.
As recently as 30 days ago, NAR, and CAR were still beating the boosterism drum for their members. Now they are teaching them how to handle Short Sales and Foreclosure properties. Appraisers were being beat up over the Declining Value check box issue.
Nominal sales prices are now declining in half of the metro market areas and by the end of the year are expected to be declining in all of them. Moody's, through their www.economy.com predicted in October 2006 that housing prices would decline in all metro markets for the first time in 75 years. Real Estate Editors and columnists, NAR and every State Realtor group tried to beat that notion down with the continued use of words like "Soft Landing".
Blance Evans, editor of Realty Times even wrote a book entitled Bubbles, Booms, and Busts , which I purchased and read in January. It was very dismissive regarding any possible Real Estate Recession, essentially indicating that the Boom's would simply move to other markets and the buyers would move to those markets too. ??? I guess it means that when prices stop going up rapidly or start to come down, people simply move in order to be in another rising market?
Click below to read on . . .
In my 40 years of being involved in real estate, that has not been my experience. I have worked through several recessions from the late 1960's onward. No one I know of moved because the market stopped going up. Maybe Speculators or Real Estate Gamblers or Real Estate Flippers move like vulchers from market to market, no more like Carpet Baggers.
If this class of player made up as much as 25% of the buyers in most of the hot markets, and they have now moved on; what happens to supply-demand-balance issues? Once irrational exuberance has left, quick flip opportunities dry up, what are you left with in any given market? Household Incomes, and the Housing Affordability Index.
In CA, the California Association of Realtors www.car.org used to publish a semi annual Housing Affordability Index. When statewide, less than 25% of the Households could Afford the average Price, they stopped publishing it. Not publishing the information does not change the reality.
The reality is that most Household Incomes will not support the average price home in most metro markets in my State.
As all those who paid too much during the boom, and financed too much, are finding out, they have no equity. Part of the issue for the appraisal industry is that there will be huge amounts of lawsuits targeting the appraiser for inflating values. Buyers are now going to become the largest growth area or class of people suing the appraiser. This is actually an opportunity for honest appraisers.
Think of this, you get an assignment for a no-cash-out refinance of a home purchased two years ago. Using good due diligence, doing good primary research, verifying your market data and making appropriate adjustments for concessions or cash-back schemes; you come in with a lower price than what had been paid. It could simply end there.
But, there is an opportunity for the honest and skilled appraiser in this type of situation. The opportunity is to help the borrower/homeowner by referring them to an attorney who is skilled and knowledgeable in this type of case. We have two cases an associate spotted and referred to a lawyer this past month. Both of which will require expert testimony later. In both instances, the buyer had been packed into a home at an inflated price. To help make the deal work, the original appraiser left the area for "comps", went to a higher priced location and omitted the "Location" adjustment, then soft peddled the downward "Size" adjustment, omitted the "Quality" adjustment, etc. {even left off a pool on a comp}.
In 1996, I worked on a case involving a 1993 appraisal in which the Investor sued the loan broker and the appraiser, Soderberg v. McKinney, 44 Cal. App. 4th, 1760, 52, Rptr. 2nd 635 (1996) which provides that there is liability to third parties who may be unknown. If you have performed an appraisal review and discovered that the original appraisal was inflated, the property owner, lender, investor or mortgage insurer may be able to recover with your help.
The upside for you is that these cases will involve expert testimony from a professional, unbiased, neutral appraiser. If you do not know of a lawyer to handle this type of case, you can contact our client: Thomas B. McCullough, TBMLaw@aol.com, 4676 Admiralty Way, Suite 620, Marina Del Rey, CA 90292, 310 306 2520
Even if you are not comfortable with the idea of testifying, you can still make the referral. Contact me if it is a CA case and either we will help or find the right person to do so. In any event, we can each do good, serve the public good so to speak.
This year I have been doing research and writing on a book entitled "Real Estate Frauds, Mortgage Frauds, and Appraisal Frauds". So far I have read over 35 books, numerous journal articles, searched multiple databases through various libraries. I have read books on Financial Crisis, Manias, Panics and Crashes, Financial Euphoria, Real Estate Ethics, Predatory Lending, Banking Crisis, Irrational Exuberance, and Real Estate Appraisers Liabilities (it is over 800 pages including the addenda with nothing but court cases appraisers lost, appealed and lost on appeal). From this range of readings it is my opinion that we are headed into a financial crisis that involved residential real estate and residential appraisers.
Bad for those who got rich over the last six years, inflating values to help make deals work. Good for the honest appraiser who is willing to do forensic appraisal work (appraisals for court work), willing to verify, document, and analyze data in a way that they could be cross examined on it.
We have had two residential appraisers, honest appraisers, join us this past month. Both were loosing their clients due to the Declining Value issue, due to their being honest about what is really happening. We do little single family work, in fact we have only done two in the past month. But, I am now marketing our services to major lenders to do forensic appraisal reviews and expert testimony.
If anyone (ethical, honest, and skilled) wants to join us and are in our Region, please contact me as we expect we will need help. Anyone outside of our Region that is interested, please contact me also as we may be able to refer work or set up an affiliate relationship. Don't worry about testifying or being deposed. I can guide or coach you. {i.e., talk slow, ask them to repeat the question, etc}.
This graph was sent to me by Dr. Robert Shiller of Yale University. It is from his book "Irrational Exuberance", Chapter 2. The graph ends in 2005. What is happening now and for the next 2-3 years? Gravity! Prices are coming down.
Appraising in this market will require new skills, more research, more verification, and more analysis of the market and the data. Those who develop the skills to deal with this market will survive. Those who refuse to admit what is happening and continue to hit prices to make deals work, will become Black Listed.
If a client wants you to hit a predetermined value, and you want to limit your liability, use a different definition of value. Use Fair Market Value from the CA Code of Civil Procedures, which is the "highest price measurable". That should help keep the appraiser safe. Prior to 1984 we used the same Highest Price definition. When it changed to the Most Probable price concept, it seems to create confusion.
Our office is receiving more orders with current but rejected appraisals at all levels, more this year than last. Most are pure frauds, willfully inflated and misleading. At the commercial level, we have reappraised properties and found the original (current) appraisal value was over 100% high. Gulp, shades of the S&L Crisis appraisals. Unfortunately, some of the same appraisers who did bad work then, are doing it again, and have become very wealthy though the years by giving "customer service" to their clients who want or need high values.
We all have a reputation and even many facets to our reputation. During periods of declining values, having the reputation of being honest, unbiased, fair; is a good thing. If you are, but do not have the right kind of client base to sustain yourself, think about affiliating with a larger operation that has both a clean reputation and larger client base. All can profit. Few residential appraisers can go it alone and survive.
Enough, I should be working, too many reports to review or finish before going to Boone, NC on Saturday for a week long painting class, and an appraisal of a resort in that town.
Here is some color to brighten your day. Building a career is like growing roses, you have to feed, cultivate, prune dead wood to keep the plant healthy and keep the flowers coming.
"Appraisal is only hard if you try to do it right, or if the market is going down, or both."
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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