Reports of delayed appraisals and rising appraisal costs flourished in 2016. In this article, we try to shed light on potential paths the industry might take moving forward given trends in demographics, training, and automation. This analysis suggests that while industry constraints may improve in the short-run, the long-term constraints are significant. Furthermore, neither expanded training of new entrants nor automation alone will solve anticipated growth in demand on the appraisal industry.
Earlier this year, NAR Research surveyed REALTOR®-members who were also in the Appraiser Trends Study. The key findings were that while some appraisers would exit the industry in the near-term, a demographic waive of baby-boomer appraisers planned to retire in the not-so-distant future. Simultaneously, training the next generation was a problem. Finally, while some point to automation as a salve other suggest that it can only partially satisfy needs and creates headwind to attract the next generation of appraisers.
The intent of this analysis is to shed light on potential changes to the appraisal industry in the coming decades. Any forecast is susceptible to changes in assumptions and a long-term forecast like this one even more so. This analysis is not all-inclusive, but is intended to gauge the magnitude of major trends in the industry and possible solutions. The remainder of report is as follows; both supply of and demand for appraisers is estimated and then compared to a period of stress, shortages and rising costs, to provide insights about potential stress in the future.
Supply of Appraisers
First, the total number of unique active appraisers in the United States must be determined. The Appraisal Subcommittee (ASC) maintains a database of all licensed or certified appraisers in the United States with roughly 96,0001 records. However, this database is an amalgamation of state databases and does not have unique identifiers for appraisers nor does it account for appraisers with multiple designations (e.g. certified, certified residential, licensed residential). Respondents to NAR’s Appraiser Trends Survey indicated in which state(s) they operated as well as their designation(s). These responses were used to estimate the magnitude of duplication in the ASC’s database and to deflate that figure in order to provide an estimate of the total unique residential appraisers at 82,000.
The Appraisal Foundation (AF) maintains records of the number persons who pass the National Uniform Licensing and Certification Examinations (NCLUE) exam each year. This exam is required before an appraiser can practice. In 2008, 2,087 persons passed the exam but that figure fell to an average of roughly 1,000 from 2010 to 2014, before bottoming at 662 in 2016.
Finally, participants in NAR’s Appraiser Trends Survey provided the number of years they intended to work before anticipated retirement or exit from the industry. These figures were used to estimate planned retirement for the entire population of 82,000 appraisers in the industry. Combining the expected annual new trainees and retirements to the stock of 82,000 creates a projection of the total stock of appraisers over a 50-year period (below).
As depicted below, the total number of appraisers varies widely depending on one’s assumption about the number of new entrants each year. If training continues as it did in 2016, the total number of appraisers falls to roughly a quarter of today’s level within 30 years (green line). However, at a higher level of 2,087 new entrants annually as in 2008, the industry actually eclipses today’s level within 40 years (grey). Given the difficult and time consuming training process as well as steady decline in number of new entrants since 2008, the middle-path (blue) was selected for this analysis (an alternative is used later). Thus, some modest improvement in training is incorporated into the baseline.
Demand for Appraisals
Demand for appraisals comes from the number of unique home sales and refinances. Nearly all home purchases, new or existing, require an appraisal. To forecast the volume of new and existing home sales, the number of households was forecast based on a 20-year projection from the Harvard Joint Center for Housing Studies2 and augmented with the average growth rate from the Harvard study. Demand for both owner and renter occupied housing is correlated with household formation. The historic ratio of number of new and existing home sales to households in conjunction with the new forecast of households drove the forecast of new and existing home sales. Note that demand for both new and existing sales rise over time with population growth. The grey and green areas represent refinances and HELOC/improvement loans, which are assumed to decline and plateau going forward at a fixed share of purchase demand in a rising rate environment.3 This assumption is an over simplification but represents a conservative estimate in that an increase in refinances from this assumption would create more demand for appraisers.
However, as evidenced by both Fannie Mae’s and Freddie Mac’s recent forays into automated appraisals, automation will have a significant impact on the industry. Public statements by Fannie Mae indicate that as much as 10% of refinance mortgage will be automated, but discussions with industry analysts and experts suggest that it could be higher, include purchase mortgages, and might someday include government-backed mortgages (FHA, VA, etc.). As depicted above, the green and yellow dashed lines represent total demand under different levels of automation, which subtracts from total demand. The different levels of automation are:
- Baseline – 10% of all GSE refinance mortgages
- Low GSE and FHA Automation – 20% of all GSE and FHA purchase and refinance mortgages
- High GSE Automation – 50% of all GSE purchase and refinance mortgages
- High GSE and FHA Automation – 50% of all GSE and FHA purchase and refinance mortgages
Furthermore, the GSE’s share of the market is assumed to moderate toward its historic norm of roughly 40%, while the FHA’s share moderates as well to 18% by unit volume. These latter assumptions could change with GSE reform, but lower shares would suggest lower take-up of automation and therefore more demand for appraisers’ services.
Supply vs. Demand: Defining Stress
In 2016, there were widespread anecdotes of appraiser shortages, delays, and "rush order" fees. As a result, the ratio of appraisals needed (e.g. new and existing sales with refinances) relative to the number of appraisers in 2016 was selected as the benchmark for stress as depicted by the pink dashed line in the chart below. An increase in the ratio suggests growing strain and a measure above the 180 average appraisals per appraiser indicates higher stress than in 2016. Four scenarios are depicted below each with a varying degree of automation as discussed earlier. In all periods there is a short-run improvement as automation takes hold followed by increasing stress as boomers exit the industry and population-driven housing demand continues to grow.
What if training improves? In the chart below, the same four scenarios of automation are depicted, but with a higher rate of new entrants to the appraisal field, 2,087 persons per year as in 2008. With this change each scenario improves and the time to return to or approach stress levels is postponed five to ten years. However, the stress levels are breached in each scenario except for "high GSE and FHA automation" for at least a year and under moderate levels of automation stress is maintained. Even under high levels of automation, the appraisals/appraiser ratio is elevated in the mid-term.
Appraisals: The Future is Mixed
While some have bet the future of the appraisal industry on automation others are less sanguine. This analysis suggests that even with high levels of automation of appraisals, there remains a need to increase training of new entrants to the appraisal industry. Furthermore, this analysis does not account for distortions within the industry such as factors that exacerbate the demand for FHA, VA, and rural appraisals. In a future of growing demand for and declining supply of appraisers, strain on these submarkets would likely outpace the general strain on the industry.
1 As of January, 2017
3 Share of refinance applications of total applications in 1990 based on HMDA, roughly 25%