In what must be one of the most absurdly reasoned analysis articles in years, The Wall Street Journal argues that appraisers are to blame for the continuing housing bust that has now lasted more than four years.
Let’s be clear: the author, S. Mitra Kalita, doesn’t blame appraisers for creating the bust, only for extending it.
And what are appraisers doing to hold down sales? They’re being overly conservative in their appraisals.
The article cites a survey by the National Association of Realtors (NAR) that says that 10-12% of their members had a contract canceled because of a low appraisal last year. Another 10-13% saw a contract delayed, while 16-20% made less commission because a lower appraisal led to a lower sales price.
First of all, these numbers prove nothing, because it’s not a measure of sales that were canceled, delayed or lowered, but of agents who had sales canceled, delayed or lowered. Sales delayed or lowered shouldn’t figure into the equation, because they’re still sales. Now, each realtor sells an average of 7 houses a year, according to NAR. If the 10-12% of agents with canceled contracts had only one contract canceled each because of the low appraisal, which would work out to only 1.7% of all contracts scratched. Even if all these dead contracts went through, it would not create a roaring, or even a modest, comeback in housing. The very fact that the Journal article and NAR measure the wrong thing leads me to believe that they couldn’t come up with good numbers, and that the numbers of lost contracts from low appraisals is minimal.
Apart from these meaningless numbers, the premise of the Journal article is completely ridiculous. The idea that low appraisals are continuing the housing bust falls into many illogical pieces when you review Economics 101. I think somewhere in the first 25 pages, every economics introduction defines the law of supply and demand, also called the law of demand, which states that consumers buy more of a good when its price decreases and less of it when its price increases. Low appraisals should therefore lead to lower prices, which in turn should lead to more sales.
Except that few people have money to buy a new or first-time home. When we add in those who have stopped looking for a job and those working part-time who want to work full-time, we have a 16% unemployment rate. Meanwhile, most people with full-time jobs haven’t had an increase in their purchasing power in years and face increased transportation, education and healthcare costs. The fewer people who can afford a product, the lower its sales, that is, until the price of the product drops to the point that more can afford it and demand starts to pick up.
Not only do we have few buyers, those buying have the choice of many houses. There is a glut of properties on the market, primarily because of overbuilding during the boom years and the high number of recent and current foreclosures.
Few buyers is why the real estate bust continues. Many properties is why prices remain low and in many markets continue to decline. It has nothing to do with appraisals.
In fact, we should be happy that appraisers are tending on the conservative side now. We know that appraisers were part of the problem in the first place. They gave overly optimistic appraisals that whipped up the prices of properties to a frenzied froth, but everyone was happy: Sellers got more money for their house; banks took their cut, and then packaged and sold the loans, the bad with the good; buyers thought that houses would continue to appreciate at historically high rates. Of course the happiest then (and among the saddest now) were those who borrowed more money on a house they already owned than they had initially paid for the house: happy then, to treat the house like a personal bank; sad now, because they owe far more than the house is currently worth.
Appraisers were an integral part of the system of lies that created the bubble. If they’ve cleaned up their act and are acting more conservatively now, a loudly blaring free market clarion such as the Wall Street Journal should commend them for it.