Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, August 20, 2009

Trying To Protect Home Buyers is a Flop

Ok, so here's the deal. I have been trying since March to purchase a home. I gave up in the local area because they are manipulating the market so badly, that it is pointless to continue here. (See previous posts and comments).

So I went back to my hometown, found a lovely home for sale by owner rather than bank, have had a great experience working with the seller, and have had a smooth process until . . . 1 week before closing.

Suddenly the lender required me to obtain a second appraisal on the property. The second appraiser worked for a large appraisal firm, lived 40 miles away from the property location and thus knows little to nothing about the area, didn't go into the home preferring to just do a drive by, and used that minimal knowledge and my first appraisal report to re-appraise my future home at $80K below the agreed upon price. Then they charged me $220 for the shoddy work. And my broker isn't allowed direct access to this appraiser to disucss the appraisal and the lender isn't interested in the rebuttal we submitted to his report.

Now that may sound well and good, except that appraised price is too low to be fair to the seller and it means that I may not be able to close, or that I will have to start the whole financing process over with a new lender (provided the seller or I don't give up on the deal), pay for yet another appraisal from another Big Firm appraiser.

And who do I have to thank for this? New York Attorney General, Andrew Cuomo. Thanks to him, we now have the brand spanking new, Home Valuation Code of Conduct. The intention behind this was good. It was meant to protect consumers from appraisal fraud. But it seems to me that it has replaced one form of fraud with another and increased trouble and costs to a buyer and seller. And I wonder if it hasn't targeted the wrong culprit. Rather than regualte banks the right way, we are attaching the appraisers. Isn't that sort of like going for the street dealer rather than the cartel?

I think government regulation is a good thing when done correctly. The problem is so often good intentions result in bad legislation. And that gives conservatives more ammunition to shoot down absolutely needed reforms like health care. They can point to things like this HVCC and say, "See what happens with you let government regulate."

As for me, I may or may not be able to close this deal. So anyone who says, "It's a great time to buy a home!" hasn't tried to buy a home.


Raised By Republicans said...

""It's a great time to buy a home!" hasn't tried to buy a home."

I sympathize with your frustration but I suspect that your problems are largely driven by the extremely high prices of housing in California. I looked up your home town on and the median home price there is $363,400. That's low by California standards - state median is $532,300. The median household income in the city is $48,077 (California $59,948). So the median house price is around 7 to 9 times the median household income.

In this environment banks are going to be very skittish about loaning money for home purchases to any but the richest people. And given the massive speculative bubble in Californian real estate recently, they'll be nervous about the appraisals too. All that adds up to a hellish home buying experience for middle class people like yourself, US West. You really do have my sympathies.

But this imbalance between housing costs and income is not universal. The median household income in Ohio is $46,597 and the median house price is $137,800. So the median house price is about 3 times the median household income. I chose Ohio because it is so often right at the average or median for the US. I looked up Georgia to compare and the numbers are very similar.

The problem may not be a universal problem with national regulations about home buying and mortgages but rather a peculiar problem for extremely high priced housing markets like California's.

Raised By Republicans said...

I found this great table:

The median home price in the USA in the second quarter of 2009 is $174,100.

According to wikipedia the median household income in the USA in 2007 was $50,233. It's probably not far different from that now. So nationally, the median house costs between 3 and 4 times the median household income.

California's housing market is an outlier in that the prices are badly out of sync with the local incomes.

The Law Talking Guy said...

According to the CA dept of finance (, the median household income in CA for 2007 was $64,000.

According to various sources, including LA Times, the median home prices in Southern CA are down to about $250,000, nearly 40% below 2008 levels. According to SF Chronicle, the statewide median is down from $484K in 2007 to $224K today.

So as of now, the median housing price according to these data is 3-4 times the median income, quite similar to Ohio, in other words.

What is not true is that this price decline is constant across housing markets. In prime areas, prices have declined by 5%-10%, in the Inland Slumpire and such places, they are down by over 50% - indeed, those figures may or may not include the large number of deserted or simply unsold/unbuilt houses in half-empty developments that resemble the suddenly-abandoned Indian ruins for which one always posits a natural disaster as the explanation. Perhaps the Mayans just had a real estate collapse in the 1400s, and that's why there are all these empty cities...

So, RBR, this shows both the huge hit so many in CA have taken AND that it is no longer true that CA prices are out of whack with nationwide or midwestern prices. The usual Blame California First thang won't work here.

What USWest is also seeing is the curious idiocy of the appraisal game. In economic terms, the value of a house is (wait for it) what a willing buyer and willing seller are willing to negotiate. The purpose of the appraiser is not to say "I'm smarter than the market" but to add information that the buyer/seller don't have or (more likely) don't share: whether the house is what it appears to be, i.e., whether it has good plumbing, leaks, termites, etc. For an appraiser to just look at a house and say, "you're overpaying" when both sides have negotiated a deal they are happy with, WITHOUT information unavailable to both sides being thrown into the mix, is paternalistic and opposed to modern economics.

USwest said...

Thank you, LTG. That is what I am seeing. And that is the point I wanted to make. California is balancing out in many markets, despite the efforts in some local markets to manipulate the system.

In my case, the first appraiser confirmed that we were striking a fair deal considering the neighborhood, condition of the house, local market, etc.

What the HVCC did was give the FHA lender an opportunity to deny the loan that I had already qualified for and locked in. In the process, it charged me more money for an already expensive process and nearly lost me a home that I have already invested time, money, and emotion in.

If you want to save the housing market, you can't burden the transaction any more than necessary. You want to facilitate it. That is what the tax credit is all about. Now I am working with the listing agent's in-house lender to see if we can't lock in a similar loan. That is the only way to save the deal.

The second appraisal was of very poor quality. It bears all the marks of what the linked article describes. Now that appraisal gets put into the FHA computer system, wiping out the original appraisal. So that means I wouldn't be able to successfully get money with a different lender. Once that bad appraisal comes up, we're done. Result: the seller has to relist the property and tag it as ineligible for FHA loans, thus locking out solid, middle class buyers like myself. We are the only hope left for helping this market. The seller will have to list lower now and wait for another buyer, which may cost him more money and time. It is a loose-loose situation.

I had to do a quick step to put a new loan in motion before they entered the bad appraisal into the FHA system. For now, it looks like we made it.

My point is that you can't save the housing market by trying to get banks to re-negotiate existing mortgages. You have to target solid, good qualifying buyers, the ones like myself who have been sitting on the sidelines waiting. That is strong blood pumped into a weak system. That helps the seller, the bank, me, the whole system.

Pombat said...

Nothing much to add except oh grief, I hope it all works itself out for you USWest!

LTG - Mayan real estate collapse :-)

Raised By Republicans said...

Dueling data sources... LTG's sources seem to be saying the problem in California is balancing out. Great. Of course, the 3-4 times figure is pretty much the norm everywhere else in the country. But in California and similar markets, I doubt it will last. If I'm wrong I'll be happy about it.

Speaking of data sources...

US Census data on household income by state and by number of members of in the household:

Here is a great table from the US Census bureau of the average and median US house prices BY MONTH going back to 1963!

Here is another US Census bureau database of the percentage of housing units that are single family detached dwellings (gov speak for "house.").

Raised By Republicans said...

RE: Appraisals...

I really do sympathize with US West's problems. It sounds like the bank does not have their act together - why would they need multiple appraisals? My bank only did one when I bought a house.

Consider this from the banks point of view. They are loaning a large amount of money to someone - a loan far in excess of the barrower's income.

The appraisal is there to estimate not the value of the house NOW but rather what they think the house will sell for in the future. They want to know if the borrower will be "upsidedown" on the house the minute the step across the threshold.

IF the borrower plans on staying in the house for a long enough time period to get back "right side up" on the house, no worries. But most home owners move out of their houses after something like 5 to 7 years (that's what I remember my realtor telling me). So if the bank is considering loaning someone some amount of money for a house and the house isn't worth the amount of the loan (or at least close enough to the anticipated value of the house to make loan repayment feasible) then the bank has a legitimate interest in avoiding that loan.

This can be particularly tricky when house values are dropping (as they are now).

USwest said...

I called it! NPR covered this very issue this morning.

Thanks for you moral support. My situation is, apparently common.

In fairness, appraisals are always tricky. I understand where the bank is coming from. But in this case, the lender did not need to use the HVCC and ask for another appraisal because it was an FHA loan, which doesn't require a "field" inspection.

After looking at both appraisals, I notice that the firs appraisal did a sold, thorough job with pictures and all. The second plagiarized his report, panned it, and did a mediocre job. If the quality of the second appraisal had been good, it would have offered me more information. Instead, it did not. The first appraisal cost $450. The second cost $220. The bank found the cheapest appraiser, who based on his license, was pretty inexperienced.

Anyone who bought a house 3 years ago had a totally different experience than the current climate. That is why I keep blogging on his issue. Whenever you have a crashed market, you have great opportunity and there are good number of crooks who will take advantage the situation as well.

Raised By Republicans said...

NPR must be reading our blog.

Raised By Republicans said...

By the way, from the banks' perspective an appraisal system that generates wildly varying appraisals at the same time for the same house, does not do them any good. First and foremost the banks (and the buyer) need an accurate appraisal of the future resale value of the house.

This new regulation (glad it wasn't in place when I bought), seems to provide an incentive for minimizing the cost of the appraisal rather than maximizing its quality. It will take time for reputation effects to allow banks to figure out which companies do a good job for the price.

The Law Talking Guy said...

RBR- I don't think we have dueling data sources. The big drop in housing prices was after 2007- I think your data is largely from 2007. Btw, the chart you sent does not have state-by-state data but regional and metro data.

The Law Talking Guy said...

The purpose of the appraiser is to a CYA for the loan officer. It serves no other economic purpose UNLESS, as I mentioned before, the appraiser is adding information that the market previously did not possess.