Appraisals Contribute to Bubbles and Exacerbate Downturns?

We all know what appraisals are and that they are primarily a tool used by banks once a buyer goes into escrow on a property.  But did you know that there is evidence to show that, at least in part, appraisals can contribute to house price bubbles and exacerbate downturns?  Prior to the recent 'great recession' a preponderance of appraisals came in above contract pricing.  This helped the market to climb faster, perhaps, than it might otherwise have done.  In May 2009, federal guidelines were implemented under what is known as the HVCC - the Home Valuation Code of Conduct - that placed an independent intermediary between lenders and appraisers.

The intent of this regulation was to mitigate the risk of appraiser conflicts of interest, but, well intentioned though it was, one result was that appraisers became overly conservative and a greater proportion of appraisals started to come in below contract prices.  This led to a greater number of properties failing to find financing, contributed to a decline in liquidity, and contributed somewhat to the downturn.

In today's podcast, Dr. Leonard Nakamura, Vice President of the Federal Reserve Bank of Philadelphia, explains the background to this phenomena from the perspective of his agency.

Click here to listen on iTunes.

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2 Comments on "Leonard Nakamura, Vice President & Economist, Federal Reserve Bank"

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Interesting discussion. Listened in car on way to work…

I listened to several of your podcasts today for the first time. I enjoyed them very much! I appreciate your candor. The information presented was very informative and helpful. Thank you! ​I agree with many of the things said in the “Impact of Appraisals on the Single Family Home Market” podcast. Having been a residential real estate appraiser for some 19 years, I have seen the negative impact that has resulted from poor appraisals. Sadly, there are many very good real estate appraiser’s that have been paying a heavy price for the short cummings of some. I would note that… Read more »