Inflated home appraisals fueled the housing boom and also contributed to its bust. But some experts now believe that the opposite is true: some appraisals are running low and killing deals at a time when the market desperately needs a boost.
When Jason Klohs opens the door to a duplex rental property he owns in Minneapolis, you get a view into how the real estate market has changed.
Klohs bought the duplex in 2004 for about $200,000, and then he pumped about a $100,000 into renovations, including work in the kitchen.
Klohs rents the duplex to students at the nearby University of Minnesota.
It used to be someone in Klohs' situation could eventually sell a rental property like this for a handsome profit. But when Klohs put the duplex up for sale a few months ago, he only expected to recoup his investment.
That's the first way the market has changed.
Still, Klohs got an offer he found reasonable. It covered his renovation expenses and left him with a little leftover.
"A buyer came in and bought the property at approximately the $300,000 range," Klohs said. "They were excited, I was excited," Klohs said.
Then, an appraiser arrived.
Klohs doesn't think the man even looked inside the house, which is nicer than the exterior. Outside, a yard full of woodchips doesn't make a great first impression. Klohs added that the "comparable" properties the appraiser used to evaluate the house were foreclosures miles away. Some were mold infested. Those factors took a toll.
"The appraisal came back with incorrect information, showing a value of $100,000 less approximately than the agreed purchase agreement," Klohs said.
The appraisal company could not be tracked down for comment.
Klohs said if the buyer had chosen to move forward with the deal, she would've had to have come to the table with nearly $140,000 cash, and she wasn't prepared to do that.
The deal fell through.
That's the second way the market has changed. Lower than expected appraisals are now killing sales.
Some say a new set of federal regulations is to blame. The regulations are called the Home Valuation Code of Conduct. The code affects conventional loans sold to Fannie Mae or Freddie Mac and took effect May 1.
Since then, the National Association of Realtors says 37 percent of the group's realtors have reported lost sales. A big chunk of both the realtors and appraisers the group represents report a "perceived reduction in appraisal quality."
This all means it's tougher for consumers to sell, buy or refinance a home. The new rules also make appraisals costlier for consumers.
Despite the criticism of the new code, Julie Schwartz, an appraiser in White Bear Lake, said it did come about for a good reason.
"It used to be that appraisers were hired directly by lenders or mortgage brokers," Schwartz said. "There was a relative cozy relationship that existed, where an appraiser would routinely get business if they routinely came up with value that made the deals work."
Those practices led to inflated home values, and when the housing market crashed, homeowners owed more than their homes were worth.
But now, under the new regulations, loan production staffers who work on commission cannot hire the appraisers with whom they were once so cozy. Instead, lenders hire the appraisers, typically through appraisal management companies, which have been around for years but are now proliferating.
Many realtors say the new regulations do have admirable intentions. But overall, St. Paul realtor Teresa Boardman rolls her eyes when asked about the topic.
"Just kill me now. We don't need any more problems," Boardman said.
Boardman said it's hard enough selling a house in this market without appraisers coming in and squashing deals.
Like Jason Klohs, Boardman believes the appraisers hired by the management companies are not doing a good job of finding the correct comparables.
"We're seeing some appraisers that we feel just don't know the area or the market," she said.
Fannie Mae and Freddie Mac are taking such criticisms seriously. Last week, they issued statements encouraging lenders to hire qualified and experienced appraisers. The Mortgage Bankers Association did not respond to requests for comment on how common these issues are.
But Boardman acknowledges that sometimes low appraisals are accurate.
Jeff Schurman, the head of Title Appraisal Vendor Management Association, a group representing appraisal management companies, agrees. Schurman said appraisers are not conspiring to push down values.
"They don't set what's going on in the market," Schurman said. "They are a reflection of what's going on in the market."
And, he said, 40 percent of the market consists of distressed properties going at fire sale prices.
"The real reason for the appraisals coming in "low" has been that the market is still in turmoil," he said. "Home sales have not yet rebounded. Home prices are still in many areas still falling."
Schurman also contests the idea that the appraisers working for management companies are inexperienced. Many, he said, have been working as independent appraisers for years.
Regardless of appraisers' experience level, it could be that conservative appraisals are now just the norm.
Appraiser Julie Schwartz said her cohorts were low balling even before the new federal rules took effect.
"Basically the appraisers are afraid of getting sued," she said. "In order to prevent liability, they are covering themselves."
Schwartz was sued by a lender a couple years ago, and the premium on the insurance she carries as an appraiser went up about $10,000 a year. While Schwartz doesn't do many appraisals related to residential real estate financing these days, she's learned her lesson. When she submits an appraisal, she errs on the low side, too.