When the real estate market crashed during the last cycle, many believed that a mass of fraudulent appraisals were a major factor. Congress was also of that opinion. That is why the subject of appraisals was addressed in the Dodd Frank bill, also known as the S.A.F.E Act, that went into effect in 2010.
According to a recent article in the Wall Street Journal: Dodgy Home Appraisals Make a Come Back
Almost 40% of appraisers surveyed from Sept. 15 through Nov. 7 reported experiencing pressure to inflate values, according to Allterra Group LLC, a for-profit appraiser-advocacy firm based in Salisbury, Md. That figure was 37% in the survey for the previous year.
“If you thought what was happening before was an embarrassment, wait until the second time around,” said Joan Trice, Allterra’s chief executive and founder of the Collateral Risk Network, which represents appraisers employed by lenders and other companies and has been meeting with regulators to discuss concerns about appraisers being pressured into inflating values.
The percentage of appraisers being pressured to push values has been on the rise over the last couple of years. That is exactly what happened into the peak in real estate prices right before the crash. So is history repeating itself?
On a technical level this dynamic between the market price and what appraisers are being asked to do is called a convergence. As the natural push of the market starts to wane the artificial push of twisting appraiser arms starts to take over. The below graph is helpful in visualizing this dynamic.
The graph shows that since Nov 2013, the rate of change in real estate prices has been slowing dramatically. They are still going up, just not as fast as they were before. That is why the pressure on appraisers to inflate prices is starting to increase. The red line drawn on the graph shows the direction, in percentage terms (not to scale), of appraisers that are reporting pressure to inflate values. The two lines are moving towards each other in opposite directions or converging.
That information combined indicates that the market in real estate prices for single family homes is at structurally fragile point. If the market was as strong and healthy as soon are trying to report, why the need for added pressure? I think the odds are good that we will see a significant market correction in home prices soon as history repeats itself.