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Appraisals off the mark in hard-hit regions

January 20, 2011 - A new report shows the importance of accurate appraisals, especially for buyers moving to parts of the country that have experienced the largest home price fluctuations.

Mortgage technology firm FNC analyzed a random sample of home appraisals from January to December 2010 and found that more than 60 percent of the properties were appraised for prices greater than their pre-closing contract prices. Appraisal values came in an average 1.7 percent higher than contract prices, said the report, though the discrepancies were even higher among homes priced below $300,000. During October, 23.8 percent of lower-priced homes were overvalued by more than 5 percent, while just 10.9 percent of higher-priced homes were similarly overvalued.

Ultimately, buyers relocating to cheaper homes in harder-hit communities might be more likely to encounter overvalued properties, said the report.

"The study indicates that the difference is likely caused by liquidity-driven homeowners who are forced to offer more attractive, below-market prices in exchange for relatively quick sales in the highly distressed lower-end housing market," explained Yanling Mayer, FNC senior research economist and the study's author. "Another reason is the possibility of a marketwide over-correction in this housing sector."

Regulators have made a number of moves hoping to increase the accuracy and transparency of appraisals. Last year, the Federal Reserve issued new rules prohibiting appraisal firms from having any interest in the properties they are evaluating.
 

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