The housing market was hotter than ever last year, with pandemic-driven demand boosting home sales to their highest level in 14 years. Total year-end sales volume ended at 5.64 million units, and some experts say it could reach 8 million if there were more inventory. Therein lies the problem. There’s too little supply and too high a demand, a predicament that’s disrupted the housing and appraisal industries.
Beginning in January 2020, 7% of purchase transactions had a contract price above the appraisal value. Five months later, the frequency increased to 19%, leaving homebuyers to either pay more out of pocket or request the seller to lower their asking price. As the appraisal gap widened, the CoreLogic Price Index rose as well, reaching 15% in May of this year.
Meanwhile, buyers are plucking up homes left and right. More of them are willing to pay a premium price in a fast-moving market, and appraisers struggled to keep up, so the gap has remained quite wide throughout 2021. Experts expect home price growth to moderate in 2022, but the lessons learned over the past two years are sure to change the industry in the long term.
Here are a few trends that are here to stay.
1. More Remote Contact
The appraisal industry faced a shortage of appraisers during the hot housing market. To keep up with demand, many professionals turned to desktop appraisals to keep transactions on track. This temporary flexibility allowed appraisers to meet with sellers and conduct evaluations remotely so they could complete more work and maximize safety during the pandemic.
The Federal Housing Finance Agency is making desktop appraisals an established option for originating enterprise loans. This change will be effective starting in 2022 and should reduce inefficiencies in the mortgage and homebuying process. Ten-day purchase transaction closings could become the new normal as stakeholders adapt.
Of course, desktop appraisals could backfire if fraudsters start swindling mortgage lenders. Pump-and-dump property financing could also become an issue. Thus, the FHFA will likely have to develop a set of best practices in the coming years to prevent these snags and protect you and lenders.
2. Shifting Toward Modernization
Some people argue that improper appraisals are skewing the system and contributing to industry bias. In response, the FHFA is looking to modernize the appraisal process to ensure more streamlined and accurate valuations. However, this shift could have unintended consequences.
For instance, the FHFA is considering appraisal waivers to lower closing costs and ensure speedy home sales. Experts point out several concerns tied to these waivers, including disparate impact down the road.
Typically, more privileged homeowners have easier access to waivers, while minorities and the affordable housing sector rarely receive the option to waive appraisals. This could ultimately drive costs higher for the latter group, especially if appraisers hike up prices to make up for lost business.
The FHFA is also considering hybrid appraisals, which — if left unregulated — could exacerbate inaccurate valuations. At the same time, this shift could provide more on-the-job learning opportunities for trainees. In time, the approach may solve the appraiser shortage and highlight the most experienced and knowledgeable professionals in the industry, which could help you boost revenue in the long run.
3. Eyeing a More Equitable Future
The biggest consumer complaint throughout the mortgage process is unfair appraisals. Often, these incidents occur when an appraiser is unfamiliar with the location and undervalues the property as a result. However, studies have also shown that a lack of diversity within the appraisal industry has fueled years of racial bias against minorities.
In Black neighborhoods, appraisers value homes up to 23% lower than similar ones in white areas. Freddie Mac researchers have also found appraisal gaps to be pervasive in lowering home valuations in Latino communities, where 15.4% of homes are valued lower than the contract price. In both areas, undervalued appraisals increased as the white population decreased, further reflecting an inherent bias within the industry.
With just 2% of appraisers identifying as Black, hybrid appraisals could be the key to securing a more diverse and equitable future for the industry and consumers alike. However, federal regulators will have to incentivize apprenticeships if people of color are to break into the industry and boost geographical competence. While diversifying isn’t the only approach to addressing bias, it is integral to ensuring a more equitable future for minorities and low-income homebuyers.
Looking to a New Normal for the Appraisal Industry
The appraisal industry has remained unchanged in many ways over the past 70 years. However, as the world shifts to more remote and technology-aided job opportunities, you’ll likely witness lasting transformations within the profession, even in the near future.
Over the past two years, the Appraisal Institute has amplified and accelerated initiatives to incite positive change. After decades of turning a blind eye, the profession is finally acknowledging its shortcomings. Now, it’s promising to address racial bias, employee shortages and other related issues that affect the mortgage process.
As you settle into the new normal in 2022, efforts will likely ramp up, and regulators will put actionable initiatives in place. Progress may be slow, but the only constant is change, so remember to keep an open mind and embrace the journey. These trends are here to stay.