The State of the Real Estate Appraisal Market
Like other sectors of the real estate market, the appraisal market is affected by new challenges and developments in the world at large. Homeowners, lenders, and other real estate professionals depend on appraisers as part of the real estate ecosystem. Therefore, it stands to reason that we can all benefit from knowing more about the work of our colleagues and partners.
There’s a lot of buzz in the appraisal world today about local market conditions, new technologies, and the future of the workforce. Some developments are positive, while others provide fresh challenges. Here’s our look at the current state of the appraisal market.
Housing Market Happenings
Regarding some local markets, there’s a lot going on for early fall. Following a summer buying season of strong demand, yet low housing supply, some natural disasters are now affecting the appraisal business as home buying tapers off for the winter season.
In August, Hurricane Harvey devastated the Gulf Coast of Texas, followed a week later by Hurricane Irma in South Florida. Not a month later, the U.S. territory of Puerto Rico was devastated by Hurricane Maria.
Initially, the natural disasters looked as though they would stall closings that were about to go through. The South Florida Sun-Sentinel reported many homes would have to be re-inspected before closing, potentially leading to appraisal re-evaluations in the case of significant damages. Later the paper reported values were up as the sales pace had slowed. For the financing of repairs and reconstruction, it was also assumed appraisals would be in demand.
However, recovery in some parts of these disaster zones is expected to be so difficult that government officials have taken more actions, which will affect appraisers in those regions. The Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, and U.S. Office of Comptroller of the Currency reported earlier this month that normal appraisal requirements would be waived in the federally declared disaster areas, to aid recovery. The order was reportedly issued to avoid anticipated delays due to appraiser shortages.
Finally, hurricane waivers aren’t the only challenge in the news facing the appraisal community. Wildfires in California’s Wine Country led to a disaster declaration for eight counties, including Napa, Sonoma, and Mendocino. Realtor.com notes that the local housing market could feel the effects of the fires for years to come, detailing the experience of real estate agent Russel Lee, who lost his home and now plans to relocate out of state.
Like many industries, property appraisal is poised for disruption by new advancing technologies. Over the last year, most real estate industry attention has been focused on tech disruptions for the closing table, such as electronic notary products and testing of new eClosing solutions.
Earlier this year, Forbes reported on several real estate startups to watch, including Bowery, which is said to be streamlining the appraisal process for commercial real estate using big data. New machine-learning technologies are reportedly gaining support among commercial real estate investors, according to Datanami, a big-data news publication. Experts believe the technology has the potential to reduce costs and speed the process of helping investors to know the value of commercial assets.
The future of such technology is likely more and more appraisal-free mortgages – loan originations that do not include a traditional property evaluation by an appraisal professional. Already, government-sponsored lenders Fannie Mae and Freddie Mac announced this June that an appraisal would not be required for certain refinance loan applications.
The Washington Post reported reactions to this new program were already mixed. Pete Mills, a senior vice president for the Mortgage Bankers Association (MBA), tentatively remarked that if the technology would “benefit both lenders and consumers” that it makes sense it “should be pursued.”
Appraisers were skeptical. Pat Turner, an appraiser in Richmond, Va., told the Post he saw the plan as a “throwback” to practices that led to the subprime problems of the financial crisis. Carl Schneider, an appraiser in Tulsa, Ok., added that the plan could be “fraught with danger” for banks as well as taxpayers.
Still, by August, Fannie Mae and Freddie Mac were announcing the program would be extended to some qualifying purchase loans from September forward. The Sarasota Herald-Tribune reported that the Appraisal Institute, a Chicago-based trade group, warned eliminating humans from the process would be “dangerous” for lenders, Fannie and Freddie, and the public, saying that changes could “result in a race to the bottom.” David Stevens, president and CEO of the MBA, also added a word of caution, saying automated valuations “may not necessarily be the best assessment” of “the right price to pay for a property.”
Fears of Automation
Moreover, while the Post and the Herald-Tribune talk about the risk potential for lenders and the public, they don’t say much about appraisers, who will be directly impacted by automation. News outlet Axios has reported that these algorithms threaten the jobs of some 97,000 real estate appraisers. The article notes that the profession is a solid, middle-class vocation, paying on average 40 percent more per hour than the median job for college-educated and licensed professionals.
It’s not the first time the experts have predicted doom for appraisers, though. Bloomberg wrote this summer about Brian Weaver, a veteran appraisal licenser, who famously announced the end of the industry in 1992. Still, Weaver says this time things are different, arguing that, “The future for appraisers specializing in residential mortgage work is coming to an end.”
Other experts agree that the appraisal business can’t continue with business as usual. In August, Benjamin Keys, Wharton professor of real estate, and Stan Humphries, chief analytics officer at Zillow, discussed the automation issue. Keys and Humphries noted that margin of error decreases as automation technology improves and that confirmation bias can be minimized by digital appraising. Keys noted part of the disruption is that the work is transitioning from an art to a science.
Finally, a look at the appraisal market today wouldn’t be complete without touching on the appraiser shortage issue. This is a difficult topic, partially because there’s disagreement about whether there is even an issue at all.
The most recent research from the National Association of Realtors (NAR) comes from March of this year, when the Appraiser Trends Study found lack of training, downward trends in compensation, and increasing regulation to be the most pressing issues. The NAR report found that 85 percent of appraisers plan to retire within 12 years, and there’s debate whether enough newcomers are entering the profession.
HousingWire reported in June that a “growing appraisal shortage crisis” was hampering the mortgage process, with delays for lenders and home buyers. An Urban Institute post reported that the number of certified appraisers dipped almost 10 percent since 2007. Still, some appraisers countered that the number of appraisers is sufficient, and the problem is low compensation and high regulatory burdens.
The question isn’t likely to be resolved anytime soon. An article in Working RE Magazine from 2016, argued that there was no shortage or crisis. It points to low fees as a market indicator that there isn’t a supply problem for appraisal work and some data that shows certain sectors of the appraisal workforce have increased between 2004 and 2014. As for the aging workforce, the article argues that many appraisers enter the profession later in life as part-timers. The article also contends that a shortage of new trainee talent now will “solve itself” when fees begin to rise. Nonetheless, NAR and other groups continue to push for changes that will increase the number of appraisers.
The real estate appraisal market today is in a state of change, not unlike many professions in the real estate world. An increase of technological innovation promises to streamline the process of providing lenders and property owners with new options. However, such innovations are likely to disrupt business and could transform the industry significantly in a matter of years. Pressing questions for appraisers include unpredictable local market conditions that can even include natural disasters, as well as ongoing questions over regulation of the industry and market forces governing compensation. With no easy answers in sight, it is likely appraisers will continue to deal with such issues as we head into 2018.