This week I wanted to discuss some changes we are starting to see in our local real estate market with regards to appraisals. Quickly, an appraisal is an unbiased professional opinion on a home's value, used whenever financing is involved. The lender just wants to do their own bit of due diligence on a property and make sure that the home (their collateral) is valued appropriately. Most residential sale agreements include a financing contingency that must be satisfied, with an appraisal value equal to or above the sale price. Right now, we are in an interesting place with regards to appraisals.
In most of 2020 and 2021 the concern with regards to appraisals was: Would the value come in to support the purchase price in a rapidly increasing market? If the appraisal comes in low, and the buyers want to move forward, what can be done to keep the deal alive? In the last couple years, I have written many offers that included language such as, "in the event the appraisal comes in below the contract price, client X will pay up to $Y amount to bridge the appraisal and sale price gap." The reason for this was that competitive offers had to remove as much risk for sellers as possible. Two of the biggest hurdles in a real estate transaction can be the inspection and the appraisal, so anything a potential buyer can do to remove those risks will surely make the seller feel better. Now as the market shifts from an absolute sellers' market to a more typical sellers' market, home prices and appraisals will be adjusting.
Currently the real estate market nationwide is uncertain. The recent rapid rise in interest rates has begun to impact both buyers and sellers. It's pushed some folks out of the market (many first-time home buyers) and those who already own have decided to "see what happens" over the next handful of months. Sellers have seen the market cool slightly; prices are no longer rising rapidly and appear to have leveled off a bit. This can have some effect on appraisals since they are based on recently sold comparable properties (typically the last six months). Even over the last few weeks things have changed a bit more as rates have climbed a few times now in 2022. So now appraisers must factor in that the market is no longer rapidly rising, and perhaps plateauing, or perhaps declining slightly. The issue can be that not all markets move in the same direction at the same rate, so this can be a cause of concern with regards to appraised values, and why we have seen some come in a little low, while others continue to come in at value or above.
Homes are still selling in a matter of weeks or a couple of months, and while this may seem like an eternity compared to 2021, this is still very, very fast. Prices adjusting slightly from all-time highs is not a sign of impending doom; just a shifting market. We must wait and see how the market shifts affect buyers and sellers, but for right now the rising rates have cooled the market a bit. As we see prices continue to stabilize, that may bring some buyers back into the market. Like I said in my last article, time in the market beats timing the market; so, if buying makes sense for your situation, buy. If you cannot make ends meet, then perhaps now is the time to wait a little longer.