Soaring Home Prices Roiling Appraisals, Upending Sales
In Aug., 13% of appraisals came in below a home’s contract price. It was higher in May (19.7%), but is still up compared to sales early last year (7.3% in Jan. 2020).
NEW YORK – An abnormally high number of homes across the United States are being appraised below their agreed-upon sales prices, causing some deals to implode.
With home prices soaring in recent months, buyers often pay above asking price to win bidding wars. As a result, CoreLogic estimated that about 13% of appraisals came in below the contract price in August. That’s better than in May (19.7%), but still notably higher than pre-pandemic appraisals. In January 2020, it was 7.3%.
The disparity underscores the risks buyers face in the current market, especially those stretching their dollars to win a bidding war. Mortgage lenders will typically offer only enough to cover the appraised value of a home, forcing buyers to either provide the balance, renegotiate or terminate the deal if an appraisal comes in below the contract price.
Many buyers prepare for the possibility of a lower appraisal by making down payments of just 5% to 10% and holding their extra cash in case they need it to make up any difference should the appraisal fall below the sales price, says Phoenix-area Realtor Nicole Dudley.
To create a home appraisal, appraisers normally rely on factors like data from recent closed and pending sales. But since sales usually close a month or two after going under contract, some buyers say rapidly increasing home values can sometimes skew appraisals that rely on home values recorded months earlier.
In a separate poll by the National Association of Realtors, 12% of contracts closed or terminated in August were hit with appraisal issues, compared to 9% in August 2019, before the pandemic-fueled housing surge.
In recent months, many buyers voided their right to terminate a contract due to a low appraisal in an effort to make their offers compete. However, this practice appears to be waning somewhat as the market cools.
Source: Wall Street Journal (10/10/21) Friedman, Nicole
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