My New Blog

It has now been since May 1 the HVCC has taken affect.  Needless to say it has caused significant heart burn in the appraisal industry for a number of reasons. 

The Home Valuation Code of Conduct was developed to keep mortgage brokers from influencing appraisal outcomes.   Thus we have the creation of scores of Appraisal Management Companies that act as "buffers" between the appraiser and the broker.   That is clearly a good goal.  Brokers should not be influencing outcomes of appraisals or threaten to take business away if values don't come in.

But here are the problems from an appraiser's stand point:

1)  Appraisal management companies are now competing for work.  So they will try to lower fees, promise ridiculous turn times, and require constant updating.  This isn't a problem now because of the high volume.  But when the volume goes back to normal appraisers are going to be on the short end of the stick.  AMC's will cut fees and expect the world from appraisers to maintain business. 

2)  Appraisal management companies slow the process down considerably.  I don't know how many times I have been asked by the borrower if I have turned in the appraisal yet.  Sometimes it has been a week or two after I have sent it to the AMC.  In the "old" days the broker would get it in a few days after I did it.

3)  Appraisal management companies have sought to add "value" by doing reviews of appraisals before they are sent to the lender.  This really slows the process and is time consuming.  For example today I was asked to comment that no agricultural activity was taking place on a 10 acre parcel.  Well the problem was that it was zoned Forestry not Agriculture.  Agriculture activity isn't legal.  So I had to open up the appraisal, write a comment, and send it in again because a reviewer didn't have a clue about zoning.  That's not so serious, but if you have to constantly do this, after awhile it gets real old.  I swear that reviewers don't read the report either.  I don't know how many times I have had to make underline and put in italics comments I have put in the report which they are asking for.

4) Appraisal management companies are constantly hounding us to update schedules, appointment times, etc.  I sometimes feel I spend an hour just on web sites trying to keep them informed about things which are pointless. I understand their need to keep the client informed, but I never had so much problem keeping clients informed until AMC's were involved.  What a hassle.

5) Appraisal management companies slow and confuse the lines of communication.  Yesterday I was asked to do an appraisal and found out the homeowner was in the middle of remodeling the house.  It had no flooring or kitchen.  So I called up the AMC, they had to call the lender, the lender had to call the homeowner, the lender then called the AMC, the AMC then called me.  Well they then came back to me with a list of conditions, which I then had to call the homeowner about, which I then had to call the AMC about, which the AMC then had to call the lender.  This little circus took about a half hour of phone calls.  Waste of time!  If I could have talked to the lender directly it would have been solved in 5 minutes. 

Things are busy now, and the fees are fairly decent because there is plenty of work.  I dread the day when it gets slow, because AMC's will then make my life even more difficult than it is.  This will simply drive appraisers out of the business, which will ultimately lead to higher fees as appraisers simply say, "NO!" to AMC's. 

I have been dutifully filling out the 1004MC since April 1.  It is a complete, total, unambigous waste of time and money.  This is a form designed for markets that are urban and consistent throughout the year.  It is not for rural and seasonal areas (by that I mean we actually have a winter). 

The only thing this form does is raise the fee of appraisals because most of us have increased our fees anywhere from $25 to $50 to hassle with it.  This form needs to go by way of the junkyard; at least for rural and seasonal markets.  There should be one big box to check on it that says, "DOES NOT APPLY TO THIS MARKET."   That would save the borrower money and appraisers time.

One of the means for homeowners to refinance their homes if they do not have enough equity for a conventional loans is the FHA loan.  However there is a catch to this.  If your loan to value ratio is over 85% it will mean that two appraisals will be required by two different FHA approved certified residential appraisers.  For many people this can be pretty costly, and many will not be able to afford this.  I just was asked to do a drive-by for one home that had been appraised, but the other will need to be a full interior.  A drive-by is fairly cheap when all the data from the previous appraisal is available.  However a full interior means a fee of anywhere between $350 to $375.  That means that a homeowner could have $700 to $750 invested in appraisals.  Some companies may eat the cost of the second appraisal if the first appraisal comes in at a particular value, but there is always the risk that the second opinion of value is different.  I'm also not sure how underwriters will evaluate the differences in appraisals.  Appraising is not an exact science, and it is very easy for two appraisers to have a difference of opinion of 5 to 10 percent; depending upon how good the comparables are.  So if I come in at 150,000 and the first appraiser came in at 160,000, it doesn't mean that one is wrong and the other is right.  It simply means the two appraisers looked at the property just a bit differently.  It is clearly within the margin of error. 

Personally I believe a desktop review would be better, or a field review if necessary.  I think doing two appraisals requires too much time and costs the consumer too much money; although it helps my bottom line.  The one drive by appraisal I did could have easily been a desktop review.  I'll see on the full interior appraisal.

The recent massive spending bill by the Obama Administration is going to cost this country much more than it will provide. There will no doubt be some short-term relief. The extent of that relief has been widely debated. But whenever nearly 800 billion is injected into the economy something should happen. The real problem however is going to be what happens after the spending is over. The likelihood of the economy growing itself out of the huge deficit we have incurred is highly unlikely. We would have to grow at a rate unseen in the history of the United States. Here is what the likely economic scenario will be:

1) Interest rates will rise on everything, including mortgages. Mortgage rates are tied to Treasury securities. These securities are bought by investors to fund the spending of the government. They follow a supply and demand principle. If demand is stable and the supply goes up that means the value of the security goes down. The only way for the government to entice people to buy that security with all the other options for investments available is to raise the interest rates on the security. So instead of issuing them at a 3% rate of return, they must now issue them at 6%. Mortgage rates are tied to treasury rates. That means mortgage rates go up by 3%. Can you imagine what that would do to housing demand if mortgage rates went up 3% in this economy?

2) Inflation will go up. Inflation is simply too much money chasing too few goods. When the government injects money into the system through spending or printing money it creates a supply of money. If the supply of goods and services is not expanding fast enough that means people will be able to charge more for goods and services to absorb the money supply. Put it this way, if you know that someone is going to buy something from you and they have all kinds of money and they want it badly it that means you can probably ask more for it. When everyone does that it causes prices to rise, and it also cause the devaluation of our currency. That makes everything more expensive.

When inflation goes up that means banks will start charging higher interest rates on loans because they aren’t going to loan money at 5% if they know inflation is 5% a year. They wouldn’t make any money. So they’ll raise interest rates to make a profit after inflation. If interest rates get too high, then suddenly the people stop borrowing to buy cars, houses, and other durable goods. The result is another recession.

So it is my prediction that what we will see is a mild recovery from this recession, but due to the large amount of borrowing interest rates will go up. Since the government has increased the money supply this will cause inflation, which will cause even higher interest rates as the government tries to stop inflation by raising the Federal Reserve rate to contract the supply of money. The high interest rates will then cause another recession. The depth of the recession will be determined by how bad the inflation is.

How can this be averted?

1. Government will have to cut spending drastically at some near point to reduce the money supply and reduce the issuance of treasury securities. Borrowing and spending by the government will need to be drastically reduced at just the right time.

2. The supply of goods and services needs to be expanded to absorb the money supply without causing inflation. New businesses will need to grow and develop. We will need another industrial revolution, and the world economies will need to expand in order to buy those goods and services. The US can only consume so much.

The problem is that all of this is very delicate to control if not impossible because it is hard to know just exactly where things are at in the economy, and it is only after something happens that we know that it happened. That’s why often we don’t really know that we are in a recession until after we have been in it for three or four months. It is difficult if not impossible to predict when they will occur. Hindsight is 20/20. Foresight is generally blind.

I believe that it would be better to take the bitter medicine now. Consumption has got out of whack in the past decade as the savings rates plummeted. People have too much debt. Everything has to be back into balance. Monetary policy is the best way to get us out of this recession. The Fed can increase the money supply and keep interest rates low. The government doesn’t have to borrow large amounts of money and spend. This keeps inflation in check. Eventually things will come back to balance. Sooner or later people have to start buying cars etc. as things wear out. Eventually we work our way of this recession. Will it be painful? Sure. Just like a family that has incurred too much debt has to bite the bullet to get things under control so will we. But it will be less painful because once we come out of the recession we will be out. But what the government is now doing is setting us up for another recession in the next decade and that could be worse than the one we have now.

Pay me now, or pay me later.

The cause of much of our economic mess has been the mortgage crisis.  If lenders had done what they should have done, if borrowers would have been more suspicious and conservative, and if the regulators would have been on the ball we would not be in the mess we are in.

Now we have people in government trying to figure out a way to get out of this mess.  Many people believe that we need to deal with the root cause of it all which is the mortgage mess and the decline in housing values.  Thus there is the impetus to try to prevent foreclosures.  But as I have said that is easier said.  These companies that hold these mortgages have layers of beauracracy.   Some of this is because of the servicing companies that collect money for the mortgage, but do not actually own the mortgage.  It is really hard to actually find the person and talk to that person holding the mortgage. 

Below is a link to a web site that tells the story of six homeowners trying to get their mortgages reworked.  It illustrates the problem.  What's the solution?  Hard to know.  But this should give people pause that think because the government promotes something it will actually get done.  Be wary of political promises.

http://finance.yahoo.com/real-estate/article/106472/Tough-Workouts

What to do about housing?   If we help people to refinance that bought more house than they could afford will that help the slide in the real estate market?  The answer is mixed.  According to statistics about 53% of those that have their mortgages reworked still go into foreclosure.  The HOPE program touted by FHA has only helped 500 households.  They were suppose to help thousands.  The problem is far more complex then just filling out a bunch of paperwork.

First of all there is the problem of rewriting the mortgage in a market that has declined.  I recently did an appraisal on a property that was purchased in 2001 for about 111,000.  It isn't worth 80,000 today.  So how can that individual refinance?  He can't.  He's stuck.  Will the bank write down the loan 31,000.  I doubt it.  If they would get into that habit it would open up the floodgates to everyone that wanted to refinance.

Second of all we have people that can't afford the mortgage they have even if the rates are significantly reduced.  They bought more than they could afford in the first place because lending standards were too lax.  Lenders believed values would continue to go up, so they were willing to take a huge risk.  Well it didn't work.  Now these people are in houses they can't afford at any mortgage rate.  What's a lender to do?  If they foreclose they will loose thousands.  If they keep the people in the home they would have to loose thousands.  Do they take the hit now or later? 

Third we have people that got caught in mortgage schemes and were basically cheated by unscrupulous lenders.  How many of the mortgages out there are like that?  Hard to say.  If they can afford mortgages at reasonable rates then these people are worth helping.  But many of these people must realize that they may be paying a $100,000 mortgage on a house worth $80,000.  Some people are simply walking away.  They don't want to do that.   But apparently 47% have been helped.  It's probably worth it to stabilize values.  Something is better than nothing.

But we need to make something very clear.  If housing values are too high they need to come down to make housing more affordable for more people.  We should never artificially prop up housing values.  That is a ticking time bomb.   

It's time to get realistic about Burnett County waterfront properties.  Agents and sellers are living in la la land.  Properties are grotesquely over priced for the market.  Here it is December 20, and there are 162 waterfront properties on the market according to the MLS.   In the good years there were hardly any listed at this point.  Since the beginning of the year there were 96 MLS listings that sold.  In 2007 111 sold, in 2006 119 sold, in 2005 152 sold, in 2004 129 sold, in 2003 120 sold, in 2002 140 sold, in 2001 110 sold.  The average sale price the past year was 263,381.  And the average list price for properties currently listed is 299,958.  What a disconnect!  The average home is over priced by 13%.  That's huge in a soft market.

What does this tell us?  The peak was in 2005 and it has been sliding since.  I do not see any reason to think that next year conditions will be better.  Indeed I have every reason to believe they could be worse.  Therefore prices are going to have to come down significantly to get the market back in balance.  There is nothing sacred about waterfront properties.   They are subject to market forces like anything else.  In the early part of the century properties went up 15 to 25 percent per year.  I see no reason why the reverse should not be true in the next two to three years.  It's happened in other markets, and it will have to occur in this market.  The sooner we realize it the less dramatic the decline will be.

There were 65 closed MLS sales of non-watefront homes in Burnett County in the past six months.  The average sales price was about 114,000, and the median sale price was 94,500.  That is an aborption rate of about 10 homes per month.  There are 170 MLS listings on the market at this point.  This means that we have about a 17 month supply on the market. 

There were 60 closed MLS sales of non-waterfront homes in Washburn County in the past six months.  The average sale price was about 106,000 and the median price was 95,500.  This is an absorption rate of about 10 homes per month.  At present there are 175 MLS listings on the market.  This means that there is about a 17 month supply on the market.

These are stunning statistics and demonstrate just how slow the market is.  A healthy market would only have about a six month supply on the market.

People are anxiously waiting for this housing decline to bottom out.  I know I will be glad.  I hate being the guy letting people know their house declined in value so that they owe more on their house than what it is worth.  I don't like being the bearer of bad news.

So the big question remains, "How long?"  The answer is, "No one knows."  Some of this will depend upon how long and how deep this recession lasts.  Unfortunately 2.8% of U.S. mortgages are now at least three months in arrears, up from 1.4% a year ago.  That rate is projected to peak in early 2009.  That is according to a new CNN report.  That's not good news. 

Also if this recession lasts more than three quarters and people loose their jobs it could be a lousy year for real estate.  And S&P/Case-Shiller home price index which tracts income and housing values believes that we are in for a 20% decline in home prices next year.  Another forecaster is looking at a 15% decline.  The fact is it can't help but decline.  The supply is too high, and the demand is too low.  It's basic economics.

So what do you do, if you have to sell?

• Wait it out.
• Make your place shine if you intend to sell.
• Price it below market to get people to look at it and buy it.

If you are buying....

• Look for home that have been listed a long time and drive a hard bargain.
• Improve your credit score.

It's just plain ugly.  The good news is that in some areas of the country activity is picking up because of the reduced prices.  And remember all real estate is local, so my advice is talk to a good appraiser to give you the scoop on what is really happening in the local market.  And PLEASE before you buy a house get it appraised to make sure you are not paying more than you should.  You hire the appraiser, and do it BEFORE you make an offer.  You could save thousands, and in this market that could be really important.