Wednesday, Sept. 20, 2006 | The warm security blanket of San Diego’s booming housing market has been tugged away by negative trends across the board: a 25 to 30 percent decline in sales, a $10,000-plus drop in prices and an inventory level that has swollen to more than 200 percent of last year’s stock. Those starting to shiver in the cooling market include homeowners, real estate agents, construction companies and mortgage brokers.
But there’s another group feeling somewhat exposed these days – the appraisers who estimate property values for lenders.
As professionals in the lending industry have begun to call for a return to integrity in lending – such as not issuing a loan without helping a borrower understand its terms first – so have leaders in the appraisal community begun to reevaluate some of the practices that became commonplace in the boom.
It can be tricky to arrive at a valuation in a cooling market. Traditionally, appraisers inspect the property’s physical condition, functionality and surrounding neighborhood. Then they compare that property to the comparable recent sales, making adjustments to price estimates for features that are superior or inferior. Some appraisers say the boom provided a temptation to cut corners and complete more appraisals in less time.
“In a hot, rising market, you can make mistakes and the market bails you out of it,” said Roger Lopez, a real estate appraiser and the local chapter president for the Appraisal Institute, an industry accountability and education association.
Lopez explained that during the period of rapid home price escalation, even if an appraiser overestimated a home’s value, the market would reach – and usually surpass – that estimate within a few months. That meant appraisers had quite a bit more breathing room when delivering their estimates, and were sometimes tempted to save time by just looking at the comparable sales and delivering a quick appraisal based on those records.
But even when the market’s hot, Lopez said, “there’s still a right and a wrong way to do it.”
Now, in San Diego’s cooling market, the sales prices of the comparable properties may not account for the price drops some neighborhoods have seen. And those selling the homes may be throwing in incentives like cash-back rebates or electronic extras, meaning the effective sale price of the home could be considerably less than the recorded selling price.
“Appraisers that are taking secondhand data without any verification could be producing erroneous appraisals,” Lopez said.
Those who didn’t learn the right way could struggle to find work as the market settles down. Of the 1,700-some licensed real estate appraisers in San Diego County, only 325 are part of the local chapter of the Appraisal Institute, membership of which requires more rigorous education and experience than the state license program.
Jim Klinge, a Realtor in North County who’s been watching the market for more than 20 years, said a lot of people blame appraisers for pushing mortgage values high to accommodate the mortgage broker and the buyer. He doesn’t think they should shoulder all of the responsibility, though.
“It bugs me that everyone wants to bash the appraisers,” he said. “If the buyer’s willing to pay it, that’s the value of the home. The whole boom that we had was because the buyers wanted to pay the money.”
During the boom, housing was in such demand that buyers would bid each other up, past the seller’s asking price. Once a highest bidder was determined, the lender for that bidder’s mortgage would send an appraiser to complete a valuation on the property. The appraiser’s job in that situation is to make sure the buyer isn’t paying dramatically more than the home is worth, so that the lender can avoid lending more money than necessary. Klinge said he thinks the appraisers usually lined their estimates up with where the market was trending – up.
“It’s a subjective science,” Klinge said. “You could have 10 different appraisers appraise the same house, and get 10 different estimates.”
Lopez agreed that the market is subject to substantial variability.
“We only interpret the market, we don’t create it,” Lopez said. “If five or six buyers are willing to buy a home at a certain price, that’s the market.”
Sara Schwarzentraub is president of the Inter-State Appraisal Service in La Mesa and holds the Appraisal Institute’s esteemed SRA – senior residential appraiser – title. She said the best appraisers are those who don’t change their practices depending on the market.
“Honestly, we should be doing the same job,” she said.
Schwarzentraub said the boom stirred in a significant group of people a desire to get in the appraising game.
“Everyone told them they could make tons of money,” she said. “In order to make a lot of money, you have to do a lot of appraisals. You’re tempted to rush. And a rising market will cover that.”
The number of active appraisal licensees in the state is 19,944 – almost double the 11,070 licensees at the beginning of 2001, according to the California Office of Real Estate Appraisers in Sacramento.
San Diego’s licensed appraisers number 1,724. OREA did not have historical data to chart the increase on a local level, but said the region has kept pace fairly consistently with the state trend.
Greg Harding, OREA’s chief of licensing and enforcement, said the recent influx of licensed appraisers baffles him due to the cooling markets in the state. Two thousand licensees have been added to California’s ranks in the last year, he said.
“Things were already looking poor back then,” he said of May 2005, when there were only 17,822 licensees. “I do expect a dramatic downfall in licensing if we do get into a housing slump.”
Such a slump could flush the out-of-work appraisers back into the local labor pool, where they could ostensibly be joined by out-of-work real estate agents, residential construction workers and mortgage brokers – all of whom occupied thousands of real estate-related jobs in recent years. The ramifications of that scenario could strain the local economy, as well as those of cities and states across the country as similar market conditions persist.
Indeed, Harding considers the biggest problem with a boom-time blitz of licensees to be the shortage of work for them when the market cools.
“For a lot of these new appraisers coming in, the ability to find mentors is very limited,” he said. “There are so many sole-proprietor shops who can’t afford the costs of training.”
And so, Harding expects these numbers will start to dwindle as the market settles down. He said when the licensing program began in California in the early 1990s, the number of licensees reached almost 19,000 – close to the current level. But the mid-’90s were “kind of a disaster,” Harding said, when work slowed and the level dropped dramatically to fewer than 10,500.
“It wouldn’t surprise me if that happened again,” he said. “It’s going to be slower. I think there will be a lot of people who get discouraged and leave the market.”
Lopez is quick to point out that no appraiser can accurately predict exactly what the market will do.
“You can’t say with any certainty that it’s going to go up, down or stay the same,” he said. “If we had a crystal ball, we wouldn’t be appraisers. We’d be investors, and we’d be rich.”
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