ShareRefinancing soared in 2015 and 2016 as rates fell, while burgeoning home sales pushed over the five million sales mark and the TRID regulation was implemented. In this environment, anecdotes of delayed closing, difficulties getting appraisals and even “rush” fees for quick turn-around appraisals began to percolate. Is this a short-term problem or something more? NAR Research sought insight on this issue with a recent survey. In short, the appraisal industry is a candle burnt at both ends; regulation, an altered appraisal market structure, and compensation issues burden those currently in the industry, while poor incentives make it harder to grow the next generation of appraisers. The coming wave of boomer retirements and growing needs of a changing country suggest that appraisal is an area that needs more focus.
Demand Rises While Supply Falls
Mortgage rates fell and refinancing expanded with each batch of weak economic news during the great recession and subsequent expansion. More recently refinancing ebbed as the number of borrowers who could benefit declined with the post-election jump in mortgage rates. Nearly all home sales and most refinances require an appraisal to determine the accurate value of the home on which money is to be lent. Streamline and HARP refinances do not require a new appraisal and an FHA loan that is refinanced within the program may not either.[1] In the larger context, though, these appraisal-free programs were relatively small and dwindling.
Unusually high refinance volume added to the burden placed on appraisers in recent years at the same time that the number of certified appraisers who specialize in real estate shrank[2]. Purchase demand has increased steadily for existing homes and is likely to continue modest gains in the face of rising mortgage rates as refinancing tapers off. Volume per appraiser peaked in 2012 and has eased, but remains elevated. Demand for newly constructed homes is likely to rise as well. On net, the appraisal volume should ease modestly, but remain elevated. However, the same may not be true of the number of real estate appraisers.
Boomers’ Retirement Looms
Demographics suggest an imminent decline in the number of appraisers due to retirement. The average age of an appraiser in NAR’s survey was 54.5 years and 85.4 percent expect to retire in 13.7 years…roughly the age this group will become eligible for social security benefits. This trend raises the question of new entrants.
Only 16.1 percent of respondents were actively training new appraisers and 38.4 percent of that group indicated that they do so for no compensation despite it adding an average of 10.2 hours to their weekly workload as well as added legal liability. Finally, 40 percent of survey respondents indicated that their clients (lenders, appraisal management companies, etc.) would not accept work performed by a trainee.
Industry Changes
Retirement is not the only factor affecting the appraisal industry. Dynamics within the industry, in particular the emergence of appraisal management companies (AMCs), created disincentives for appraisers to take particular assignments. Survey respondents indicated that bank-owned AMCs paid roughly half the fees that lenders or independent AMCs paid. In addition, respondents’ comments suggests that AMCs may require extra work or charge fees to the appraiser, which reduce the appraiser’s compensation.[3] Costs in general rose from 2015 to 2016, while fees were flat according to survey respondents. This dynamic may create a preference among appraisers to opt-out of assignments from lender-owned AMCs. Not surprisingly, only 55 percent of respondents took assignments from bank-owned AMCs compared to 73.5 percent for independent AMCs and 80 percent for banks.
Not All Appraisals Are the Same
The general decline in certified residential appraisers only tells part of the story. Participation in FHA, VA, and RHS was decidedly lower as reported by participants in NAR’s Appraisal Trends Survey. Nearly half of respondents chose not to perform VA loans, while more than a quarter were likely to opt out of assignments for FHA and USDA financed properties. The reason for this preference is not clear. Some argue that the standards for these appraisals are higher, while some requirements of these programs may place or are perceived[4] to place requirements on appraisers that overlap with inspectors, thus requiring separate certifications or regulations at the local level. A third rational is that many appraisers may not qualify for the rosters of eligible appraisers maintained by the VA, RHS, and FHA.
Regardless of the reason, this trend is concerning as the millennial population is large and likely to swell the housing market over the next decade as first-time buyers re-emerge. Likewise, anecdotes suggests that there is a shortage of appraisals for rural areas. Demand for appraisals in rural areas will rise if the benefits of economic growth spread to these areas as advocated by the new administration. Finally, the veteran population has grown after nearly two decades of conflict and is likely to rise with President’s proposal to expand defense spending in the years ahead. These trends will raise demand specialized appraisers, suggesting the need for training of more qualified appraisers and/or reconsideration of current impediments.
Some analysts may point to the growing use of automated appraisals as an outlet. Indeed, this trend was a point of concern for respondents to NAR’s survey. However, neither the FHA nor the VA or RHS programs currently use automated appraisals and the nature of the appraisal requirements for these programs may preclude it. In addition, as policy discussions of reforming the secondary market for mortgages focus greater attention on private market participation and higher costs, this change would only raise the onus and likely market share for mission driven programs like the FHA, VA, and RHS.
Appraisals play an important function in the flow of capital from investors to homebuyers. As the number of appraisers has waned in recent years and evidence of appraisers opting out of particular assignments increases, reports of problems have grown. Addressing these issues will gain importance as the demographics of both appraisers and homebuyers shift in the decades ahead.
[1] When the closing costs are not rolled into the balance. For simplicity, all FHA-to-FHA refinances are assumed not to require an appraisal. This would underestimate the demand for appraisals.
[2] Data on appraisers is from the Appraisal Subcommittee of the Federal Financial Institutions Examination Council as compiled and posted by the Appraisal Institute. Due to the nature of the ASC’s database, the AI’s tabulations cannot be independently validated.
[3] For instance, “With the added requirements for a report mostly from AMCs (listings, addendums, original pictures, etc) the amount of reports you can complete in a week has declined, which means the salary has actually decreased while the requirements have increased.” And “Also some AMC’s charge an upload charge that is immediately charged to my credit…” or “paying ‘technology fees’ to upload the completed report,”
[4] One survey respondent noted that the, “FHA has also caused tremendous problems with their inspection requirements of appraisers. They require appraisers to complete home inspections. Some states have home inspector acts in place. My state is one and requires us to be licensed as home inspectors if we operate, analyze and comment on 2 or more components.”