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Week of July 15th-21st
Property Tips and Tricks
The Appraisal Puzzle
When purchasing a home, an appraisal is often a crucial step in the process. Typically required for mortgage approval, appraisals can also provide buyers with additional peace of mind. An appraiser evaluating the property almost always knows the selling price of a home before they conduct their appraisal as they almost always receive a copy of the purchase contract.
This common practice raises an important question: Does an appraiser's knowledge of the contract price influence their estimate of a property's market value?
A study conducted from 2012 to 2015, examining 8,533 homes, revealed that appraisals performed with knowledge of the agreed-upon sales price were, on average, 4% higher than initial appraisals conducted without this information. This discrepancy suggests a potential unconscious alignment of valuations with the contract price, despite professional appraisers adhering to the ethical code of the Appraisals Institute.
The Counterargument: More Data, Better Appraisals?
Proponents argue that access to the contract price provides appraisers with valuable context. Understanding market reactions, such as multiple buyers competing for a property, can offer insights into factors driving unexpectedly high sales prices. This additional information may contribute to a more accurate assessment of a property's true market value.
Recent Trends in Appraisals
A 2024 analysis by CSS, a leader in real estate settlement and appraisal solutions, covered home sales across 10 states on the East Coast and in the Midwest, and found that 51% of sales had appraised values higher than the sales price - the largest share since the start of the pandemic. This trend may reflect the challenges appraisers face in rapidly appreciating markets with limited inventory (although the inventory levels are rapidly changing in many markets, as detailed above).
Implications for Buyers and Sellers
Higher appraisals can have both positive and negative consequences:
For Sellers:
- Benefits: Potential for higher sale prices and smoother transactions.
- Drawbacks: Risk of contributing to market instability and potential concerns about unfair pricing practices.
For Buyers:
- Benefits: Easier financing approval and potential short-term equity gains.
- Drawbacks: Risk of overpaying, increased debt burden, and potential negative equity if the market corrects.
As the real estate market continues to evolve, understanding the nuances of appraisal practices becomes increasingly important for both buyers and sellers. By recognizing the potential influences on property valuations, participants in the real estate market can make more informed decisions when it comes to buying and selling a home.
Real Estate News
One of These (Markets) is Not Like the Other
The amount of available homes for sale continues to pick up in certain areas across the country. In Dallas, for example, inventory is up 45% year-over-year, and sales transactions are down 11.6% YOY. Not too surprisingly, prices are down there by 1.2% YOY.
States like Florida, Texas, Colorado, and Idaho are seeing rapid increases in housing inventory and slight price drops. However, in California, home prices have not cooled off yet. Despite a notable population decline across nearly every county in the state, prices remain high. This trend defies expectations, as one would typically assume that a decrease in population would lead to lower housing prices.
Inventory on the Monterey Peninsula has increased by 32% year-over-year. Back in March 2024, inventory levels were lower compared to July 2023, but a significant number of homes have entered the market in recent months. Despite this growth, current inventory is still about 40% below pre-COVID levels.
In 2024, transactions on the Monterey Peninsula have increased slightly by 2% compared to 2023. As we move further into the year, it will be important to monitor both inventory levels and transaction numbers. With the peak home-listing season nearly over, continued inventory growth combined with fewer transactions could lead to downward pressure on prices, similar to what is happening in the Dallas market.
Mortgage Rates Relax
Mortgage rates fell a bit this past week, and are currently sitting at the lowest level since March. Is it impossible to envision a scenario of 5.X% rates on the 30-year mortgage before the end of the year?
Stock Market Froth?
The stock market hit a new high (again) but global hedge funds have been reducing their exposure to this sector, specifically large, tech-related stocks.
Dollar Strong, Foreign Purchases Weak
There was a 36% drop in foreigners purchasing property in the country from April 2023 to March 2024, likely a result of higher mortgage rates and a strong US dollar.
Underwater Homes
The number of underwater homes in the U.S. has reached a record low. An underwater home is one where the mortgage balance exceeds the property's value. In 2010, 23% of homes were underwater. Today, only 1.8% of homes across the country are in this situation - the lowest percentage ever recorded.
San Francisco Fast-Tracks Housing Approvals
Recently, San Francisco adopted a new bill to streamline the development approval process and encourage more homes to be built. This new bill, SB 423, will accelerate the time it takes to approve most new housing in the city, decreasing approval times from two years to just six months. Slated to take effect in many other cities across the state next year, SB 423 is intended to streamline development for many areas, including coastal communities.
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Jonathan Balog
DRE# 01980970
Broker
M: 831.747.0310
[email protected]
Compass is a real estate broker licensed by the State of California operating under multiple entities. License Numbers 01991628, 1527235, 1527365, 1356742, 1443761, 1997075, 1935359, 1961027, 1842987, 1869607, 1866771, 1527205, 1079009, 1272467. All material is intended for informational purposes only and is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to the accuracy of any description or measurements (including square footage). This is not intended to solicit property already listed. No financial or legal advice provided. Equal Housing Opportunity. Photos may be virtually staged or digitally enhanced and may not reflect actual property conditions.
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