PMC Mortgage Lender's Blog

December 9, 2011 – One out of three builders are reporting losing signed sales contracts during the preceding six months because appraisals on their homes are less than the contract sales price, according to a recent nationwide survey conducted by the National Association of Home Builders (NAHB).

“The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev.

Too often, due to faulty appraisal practices, brand-new homes with sparkling appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair.

The result in many cases has been that the new house winds up getting appraised at less than the cost of construction.

That is precisely what is occurring in today’s marketplace, according to the NAHB survey, where a full 60 percent of respondents reported they were experiencing appraisals coming in below their contract sales price,” states Nielsen.

“Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home.”

“This is not only unfair and unreasonable, but it perpetuates the cycle of declining home values,” continued Nielsen.

Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans.

Since Sept. 2009, NAHB has held four appraisal summits in Washington with representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors to find solutions that will allow appraisers to develop realistic valuations based on sales that are truly comparable.

While the trend of declining home prices is coming to an end in most parts of the country, resolving appraisal and credit crunch issues remain a top priority for the association.

NAHB’s latest Improving Markets Index has shown modest signs of improvement in scattered housing markets where employment is gaining and distressed properties are not as numerous.