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, a set of guidelines took effect known as the HVCC - the Home Valuation Code of Conduct - that sought to ensure arm's length relationship between lenders and appraisers.

The intent of these guidelines 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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6 Comments on "015 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 »
I have not heard the recording; however, I disagree completely with the opening statement and the title of the article. The appraiser interpret what is happening in the market. If the median sale price is increasing in my market at 7%, that is a fact that I take it from the market. It is not an argument that came from my imagination. If the regulators understand there is too much risk, why don’t reduce the loan-to-value ratio of the loans? That is not an appraiser’s job. The same is true when the market is in a declining stage. I cannot… Read more »
Mark Hastert

I did give it an initial listen and plan to come back to it again. Despite all the process and regulation appraisal is still a human endeavor. I don’t doubt that in less than a decade appraisal as I’ve practiced it will be a thing of the past. A large AMC once had as its business slogan that their appraisals were “better, faster, cheaper” with the understanding that faster and cheaper was better. As you study the process more you’ll find that almost no one ever asks appraisers how to improve the process.

I have over 45 years of appraisal experiences in all aspects. Appeasing I fully and completely agree with the statements that HVCC was a lender imposed restriction to assist the lending industry to regain control and authority over the market even in view that the market was directing us to a higher valuation. Where does anyone industry have the right to change the economics in the market place? This is unacceptable attempt to achieve this goal. It was incorrect. The market dictates the market vales not a member group of bankers. [Added added on behalf of with authorization, for Dr.… Read more »