U.S. home building fell for the second straight month down to its lowest level since October, Commerce Department data released Tuesday shows. Builders increasingly blame home appraisals, which often value properties less than expected – and sometimes come in even lower than the cost of constructing the house in the first place.
One out of three builders say they lost signed sales contracts during the last half of 2011 because appraisals on their homes were less than the sales price the buyer agreed to, according to the latest data from the National Association of Home Builders. The association says the situation hasn’t improved since. And roughly a third of builders say the appraisal amount was less than the cost of building the home.
Home appraisals occur after the buyer and builder agree to a purchase price and go into contract on the home. When an appraisal values the home below that price, buyers have difficulty getting a mortgage, increasing the chances that the deal will fall through. “We’re at the point where if anything goes wrong builders will think twice about building new homes – the appraisals are the last kicker,” says Steve Melman, director of economic services at the NAHB.
The low appraisals come at a time when the homebuilding industry is already struggling to recover. Buyers have been hesitant to purchase new homes because they’re typically more expensive than existing ones. Just 306,000 new homes sold last year – their lowest level in 48 years. That said, building permits for new construction have actually been rising.
Individuals who do try to purchase a new home often hit a roadblock once the appraisal is conducted, experts say. Appraisers determine the value of a home largely by reviewing the prices at which similar homes nearby sold for in recent months. Because few homes are selling, appraisers say they sometimes have to use homes that aren’t similar like foreclosures or short sales. That means homes with brand new appliances and fixtures could be compared to houses that are vacant and whose kitchens and bathrooms have been ripped out.
Ken Chitester, a spokesman for the Appraisal Institute, an association of real estate appraisers, says they take such inconsistencies into account and consider what those properties would have sold for if they weren’t distressed. But he adds that what it costs to build a home doesn’t necessarily equal its value. “Appraisers are doing the same thorough research and thoughtful analysis they always have,” he says. “If home values are lower than some people might like them to be that’s because the market is down.”
When appraisals derail a mortgage, the lender typically offers a smaller loan, and the buyer then has to find a way to make up the gap between their down payment and the amount covered by the loan. Builders will often come down in price in order to save the deal, says Melman, but that eats into their profits, which are already slim – net profits were 0.5% in “If home values are lower than some people might like them to be that’s because the market is down.”
When appraisals derail a mortgage, the lender typically offers a smaller loan, and the buyer then has to find a way to make up the gap between their down payment and the amount covered by the loan. Builders will often come down in price in order to save the deal, says Melman, but that eats into their profits, which are already slim – net profits were 0.5% in 2010 (the latest data) and have likely not improved since, he says. “You can’t sell too many homes at a loss, so clearly they need to work this out,” he says.