While much of the mortgage industry has shown substantial recovery since the housing crisis, there are some markets still lagging behind. In these weak housing markets, there are many rehabbed properties that are being valued for less than they are worth simply due to the state of the real estate market.
History has shown that homeowners typically value their homes at a higher price point than appraisers, but as the housing market evolves, these opinions are inching closer to reaching a point of equilibrium.
Quicken Loans' Home Price Perception Index (HPPI) found that homeowners valued their homes 1.75 percent more than appraisers in January 2016, marking a full year that this trend had continued. Last month, the gap between home values and appraisers was 1.80 percent.
"Homeowners across America are understanding their home’s worth more as the gap between homeowner estimates and appraiser opinions narrows," Quicken stated.
Mid-2013 and 2015 was the only time since 2007 that appraisers valued homes more than homeowners. This rare occasion ended at the start of 2015 and homeowner opinions continued to increase through mid-2015, up until the reversed directions and headed toward an equilibrium point between homeowners and appraisers.
“It’s always important to understand your local real estate market,” said Quicken Loans Chief Economist Bob Walters. “If home values are growing in the area, homes may be gaining equity faster than consumers realize. On the other hand, if the local market is struggling, the appraisers–who are most aware of home value changes–may recognize this before homeowners come to terms with reality.”
But there are changes on the horizon that leaders in weak housing markets are pushing to implement to resolve the appraisal gap problem.
Detroit’s Mayor Mike Duggan recently unveiled the Detroit Home Mortgage Initiative, which is designed to address the appraisal gap. The initiative increases the number of sales an appraiser can use to generate a home value, according to Urban Institute's Laurie Goodman, Director, Housing Finance Policy Center.
"The Detroit Home Mortgage Initiative addresses the appraisal gap in a more scalable manner," Goodman explained. "Banks provide borrowers with a second mortgage that, combined with the first mortgage, can exceed the appraised value of the house. Because the second mortgage can be forgiven under certain circumstances (if the home is sold and the borrower has experienced a qualifying “hardship event”), it is often referred to a “soft second.” This soft second can be used for a home that has already been rehabilitated, or one still in need of rehab."
She continued, "The Detroit Home Mortgage Initiative could have a huge impact on the city’s housing market. By allowing for mortgages with loan-to-value ratios over 100 percent, it could break the vicious appraisal spiral, which has systematically undervalued rehabbed homes."
In Detroit, there are a number of homes that need rehabbing but once rehabbed, the homes are often appraised for less than the actual value of the home and repairs. Goodman says this appraisal gap is hindering recovery for this housing market.
"This disparity creates a vicious cycle: rehabilitating is not profitable, so there is little incentive to invest in a home. Because there is a shortage of homes in good condition, when one sells a home, it is difficult to find comparable properties for appraisal purposes," Goodman stated. "As a result, the rehabbed home is generally appraised for less than the purchase price plus the cost of the rehab. Even if a home becomes a comparison property later on, the next home will be undervalued as well."
Five Star Institute President and CEO Ed Delgado recently met with HUD Secretary Julián Castro to ask the Secretary to consider issuing a mortgagee letter to set the definition and criteria for identifying vacant and abandoned properties and then accelerating those properties to foreclosure. The problem of so-called “zombie properties,” or those that have been vacated but have not completed the foreclosure process, has become an “issue of national concern,” according to Delgado. About 37 percent of foreclosures nationwide are vacant and abandoned properties, according to Five Star.
Delgado also recently spoke on the growing crisis of vacant and abandoned properties that is sweeping the country which he called a "community crisis of national proportion" at the 12th Annual National Property Preservation Conference (NPPC) in Washington, D.C.
Delgado called for national solutions for what he termed the "vacant home epidemic" and praised the recently-passed Ohio State Bill H.B. 134, which expedites the foreclosure process lowers the amount of time that a property is vacant, as “an important template towards the introduction of a national course of solution for vacant and abandoned properties.” He also called on the Obama Administration to redeploy some of the billions of dollars in fines it has collected from various financial institutions into blighted communities that have suffered from years of urban deterioration.