Appraisals: Buyers vastly overpaying
Bubble Watch digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: A home price index gauging the opinions of Southern California appraisers suggests appreciation should be half of recent median sales prices — a red flag for buyers.
Source: The Real Estate Research Council of Southern California’s biannual study uses volunteer appraisers who reevaluate the same 308 single-family homes across seven counties.
The trend
My trusty spreadsheet says appraisers found appreciation is running 50% below the region’s median sales price, which has jumped to record highs in recent months.
Since 1943, the council based at Cal Poly Pomona has tracked home values with its unique metric. The group’s real estate sampling aims to avoid a math problem used in numerous price indexes — how a broad mix of what’s sold can distort a median or average price.
The latest appraisal index shows homes were appreciating at a 9.7% annual rate in April, the fastest price growth since October 2014.
Meanwhile, there was a 19.3% year-over-year jump in the widely discussed median sales price. It was the median’s biggest upswing since February 2014. The benchmark median is derived by DQNews using all sales data in a month in a six-county area.
(Santa Barbara County is the outlier between the appraisal vs. sales numbers.)
Appraisers found an even wider market divergence in October 2020, when values saw a 4.8% annualized gain, versus a 13.1% gain from all selling prices — a 63% gap.
The dissection
These differences are
not simply about stingy appraisers and their conservative estimates.
Some of this valuation spread is likely due to a huge shortage of lower-priced homes for sale, which pushes the median higher. In 201314, tight supply fueled shortlived, double-digit jumps in the region’s median selling price — with the appraisal index slow to catch up to the surge.
But some of 2021’s valuation chasm suggests irrational exuberance by house hunters desperately seeking new digs. The past year’s historically low mortgage rates significantly distorted the market as buyers aggressively paid up for new living quarters.
Please note that in the five years before the coronavirus twisted the economy, these two measurements ran much closer together. Local homeprice gains averaged 5.7% by the appraisal index, compared with only 5.4%, according to the median. Yes, appraisers were actually more generous in this period.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FIVE BUBBLES!
This pandemic valuation trend is quite unnerving because appraisers are paid to be the adults in the room, hopefully serving as a brake on an overheating market.
When a home is selling above appraised value, in prepandemic days, the buyer and seller — often with a nudge from a lender — would either compromise with a reduced price or kill the deal.
Yet housing’s current feeding frenzy is so intense that today’s buyers frequently waive the appraisal contingency — meaning they’ll absorb the cost (and risk) of any overvaluation found.
This is not some geeky math issue pitting appraisers against DQNews. The significant gap between appraisals and sales prices is a warning: Buyers may be overpaying by a wide margin.
Postscript
A look at the changing appreciation gaps between appraised values and the salesprice median, by county. In April, all six had appraisals gains below what sales prices showed. In pre-pandemic 201519, only one county had appraisal gains below sale prices and two were tied …
Los Angeles: Up 9.6% by the appraisal index math. That’s far below the 19% jump in the median sales price in April. Prepandemic gains averaged 6.3% a year from appraisals, the same appreciation as found by tracking all sales.
Orange: Up 8.8% by appraisal below 15.5% sales-price gains in April. Pre-pandemic? 4.6% gains from both indexes.
Riverside: Up 10.7% by appraisal below 19.6% sales-price gains in April. Pre-pandemic? 6.4% from appraisals, just above 6.3% from sales.
San Bernardino: Up 8.5% by appraisal below 22.7% salesprice gains in April. Pre-pandemic? 5.4% from appraisals below 7.3% from sales.
San Diego: Up 11% by appraisal below 17.8% sales-price gains in April. Pre-pandemic? 5.7% from appraisals, just above 5.6% from sales.
Ventura: Up 6.7% by appraisal below 18.6% sales-price gains in April. Pre-pandemic? 4.6% from appraisals, just above 4.5% from sales.