Many appraisals will lag the market’s trend because the closed sales they rely on are themselves as much as 6 or 8 months old as of the date of the appraisal, and they were usually negotiated a month or so prior to that.
The only way for an appraisal to stay current with a rapidly changing market is to include consideration of the pending sales and active listing activity; but there are problems with that too. Realty agents are not required (and in many cases are contractually prohibited) to disclose the contract prices for pending sales, so all that shows up is the listing price; and those listing prices are all over the board. For instance, right now no more than about 15% of the listings go into escrow during any given month and some of them will never go into escrow.
There is a way to get a better handle on where the pendings will close, by analyzing the sold vs. listing price ratios of the closed sales data. It was listed for $420k and sold for $400k, thus indicating a 5% difference; repeat that with a dozen closed sales then apply whatever trend they demonstrate to the currently pending sales to guess where they’ll end up. But that’s very inexact, too, because of the wide spread on the listing prices.
The other thing that can happen is when appraisers don’t follow the trend in their appraisals. Right now, about half of the residential appraisers have less than 10 years experience, which means they have never appraised during a declining market. If someone came in during a boom market and all they have ever seen is increases they may be in the habit of valuing their subject at the top of a given range because in the past that always worked out about right.
But if ranking and weighting the subject at the top of the range works during an increasing market, then the opposite holds true during a declining market. Appraisers should be shooting for that bottom of the range right now, and some of them just aren’t doing that. Some of these laggards are just being dumb, and others are doing it deliberately in order to keep their loan originator clients happy. Either way they are screwing up.
No matter what, when the market trends are moving quickly the protocols of relying primarily on the indicators from closed sales will result in some lag in appraisals. GIGO.
