I'm not suggesting that the real estate market has stalled out in Harrisonburg and Rockingham County, but in talking to someone in another part of the country (thanks for the insight, Laura!) we came to a realization that some markets have stalled out -- and it's not clear what will get them started again.

Laura and I realized that some markets are stuck in an endless loop:
Buyers can't buy because comps aren't available to support appraisals......because buyers haven't bought......but buyers can't buy because comps aren't available to support appraisals............

Some would be quick to blame lenders --- why are they holding back the market?  Buyer X wants to buy a house from Seller Y, and has written a contract to do so at a particular price.  Why then, is the lender denying the loan on the basis of the appraisal? 

Well, it's actually quite reasonable for the bank to want and need to protect their interest.  If they are going to invest $250k in a mortgage on a $300k purchase, they'd want to know if the house was only worth $200k.  If that were the case, they would have made a poor investment, and their collateral (the house) would not sufficiently cover their investment should the borrower stop making payments.

But you can likely see why this is frustrating for buyers and sellers alike.  Even though it is reasonable for a lender to want to know (via an appraisal) that a house has a particular value --- if a buyer and seller have agreed to terms, and the buyer is not overpaying for the house, why must the entire process be stopped in its tracks simply because there aren't any comps available to support an appraisal.

Here is a specific (though fictional) example of what this might look like, in a subdivision in Anytown, USA:

2008 sales prices: $250k, $255k, $260k, $255k, $250k, $255k, $255k, $255k
2009 sales prices: $250k, $245k, $245k, $245k
2010 sales prices: no sales!

Then, when a buyer and seller agree on a sales price of $225k in early 2011, they certainly think that everything should go quite smoothly with the transaction.  But if the lender can't find any comparable sold properties in the past 6 to 12 months that support , they will likely deny the loan on the basis of the appraisal. 

What are the buyer and seller to do?  How does a market get started again after a very slow spell, given that appraisals are required for loans to move forward, and that comparable sales are required for appraisals???

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Stretch back to the 1st century BC, we find the following familiar quotes from Publilius Syrus, a Latin writer of mimes (thanks for the tip, Dave!):

• Never find your delight in another's misfortune.
• A rolling stone gathers no moss.
• Every day should be passed as if it were to be our last.
• No one knows what he can do till he tries.

Another, which provides an interesting perspective on modern day appraisal practices is "Everything is worth what its purchaser will pay for it."

While this may have been a prevailing theory at the time, modern day appraisal practice takes a bit of a different stance, more along the lines of "Everything is worth what someone else recently paid for something similar."

For example.... if three fine homes have recently sold for $325k, $330k and $335k, we'd probably all agree that a fourth similar home is probably worth around $330k.  But what if it a buyer and seller agree to a sales price of $345k?  The appraisal is likely going to come back low, closer to $330k.  But despite Past Buyers #1, #2 and #3 paying around $330k, if Current Buyer #4 wants to pay $345k, doesn't that mean that it some ways the house is indeed worth $345k??

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Most sellers want to sell "above value" and most buyers wants to buy "below value."  In a balanced world, however, a seller would sell for the "actual value" of their home, and a buyer would buy for the "actual value" of the home.  That's in a balanced world --- obviously, it doesn't usually happen that way.

We get one glimpse of whether the contract price is off the mark when we learn of the appraised value through the financing process.  Here's an oddity (or is it?):

• If the appraised value is low (lower than contract price) the lender typically won't let the loan proceed, depending on the loan program, financing terms, etc.  Thus, the buyer will typically try to re-negotiate the contract with the seller since the appraiser has concluded that the house's value is below the contract price.
• If the appraised value is high (higher than contract price) the lender doesn't mind, the buyer definitely doesn't mind, and the seller usually doesn't know.  The appraiser was hired by the buyer's lender, so the seller doesn't have a right to know the value of the appraisal.
  

Here are a few interesting repercussions from some of my most recent real estate transactions....

Rent-To-Own Prospect Wants The Best Of Both Worlds
A prospective tenant/buyer (rent-to-own) wants to negotiate purchase terms for what is essentially their option to buy a year into the future.  They want to buy for the lower of the price agreed to now, and the appraised value a year from now.  Wait a minute!?!?!  It would seem reasonable (balanced between buyer and seller) to either both take a gamble on ups/downs of the market and agree to a price now OR both agree to use a value determined in the future by an independent appraiser.  The lower of the two doesn't seem very reasonable for this prospect who is already trying to negotiate by asking for a lease-to-own when it isn't the seller's intent.

Buyer Thinks Seller Should Adjust, But Won't Do The Same
This is a bit obvious from the above referenced ways that thisappraisal process works, but it does seem to be a bit odd from theperspective of trying to achieve a balanced transaction between buyerand seller.  If the appraisal comes in low, the buyer gets tore-negotiate down.  So why doesn't the seller get to re-negotiatehigher if the appraisal comes in high??

Seller Agrees On Price, Then Seeing Appraisal, Refuses Repairs
I'm exaggerating this one a bit to make a point, but in a recent transaction, the lender (for some reason???) shared the appraised value with the seller's Realtor.  The seller thus was told of the appraised value, which was more than $10,000 higher than the contract price.  Certainly, the seller felt like they left money on the table, though the day before they had been quite thankful for the buyer and the price he was paying.  As a result of knowing of the value supposedly left on the table, this seller loses much of their desire to negotiate on repairs, even making a remark about how the buyer can make repairs using the free equity inherited from the lower-than-appraisal contract price. 

And while we're on the subject of appraisals, here's another strange aspect of the appraisal world --- feel free to offer your opinions....

Wikipedia defines the "market value" as determined thorough a real estate appraisal to be:


So, wait a minute --- read that through again --- isn't that exactly what is evidenced in the real estate contract that is the basis for the appraisal in the first place??

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