Dissecting the Role of Appraisers in Housing Cost Increases
High home prices and increasing mortgage loan amounts are often attributed to banks and appraisers, suggesting that these players may be manipulating the home appraisal process to drive up costs and ensure continued profits. However, a closer examination of the roles and responsibilities of appraisers, as well as the dynamics of the housing market, reveals a more complex picture.
Understanding Home Appraisal and Market Value
Home appraisals are critical in the mortgage lending process, but they do not dictate home values. The value of a home is ultimately determined by market forces, primarily supply and demand, as evidenced by the current housing market in areas like Texas, where a shortage of available properties and high buyer demand have led to bidding wars and escalating prices.
Supply and Demand Dynamics
Currently, the housing market is characterized by a tight supply of homes in desirable regions such as Austin and Dallas, Texas. This scarcity leads to fierce competition among buyers, driving up prices. Additionally, rental rates in these areas have risen significantly, further indicating the pressure on the housing market.
Despite these market pressures, appraisers play a technical role in evaluating homes. Appraisers are not in a position to control home prices or increase loan amounts. They analyze market data to provide a professional opinion of the home's value, which is then used by lenders to make loan decisions.
Limited Influence of Appraisers on Home Prices
A common misconception is that banks or mortgage lenders can exert undue influence over the appraisal process. In reality, appraisers are independent professionals who operate within strict regulatory guidelines. A lender cannot simply choose a "preferred" appraiser and have their opinion, as they would have to justify their choice under professional and legal scrutiny. Appraisers must adhere to a code of ethics and maintain impartiality in valuing properties.
Regulatory Standards and Professional Integrity
The Federal Valuation Manual (FVM) and similar guidelines ensure that appraisers provide fair and accurate valuations. These standards are enforced by professional associations and regulatory bodies, such as the Appraisal Institute. Appraisers must be able to stand behind their reports and withstand scrutiny, making it unrealistic for them to be complicit in driving up prices for personal or financial gain.
Banks and Mortgages: Profits and Risks
From a financial perspective, banks do make profits from mortgage loans, but these profits are contingent on the borrower's ability to make regular payments. When a borrower defaults, the bank faces significant financial losses. To mitigate these risks, many mortgages are insured or backed by government programs such as Fannie Mae and Freddie Mac. These programs provide additional layers of protection for banks, ensuring that they can sustain loan portfolio losses through delinquencies and defaults.
Therefore, banks have a vested interest in maintaining the integrity of the mortgage lending process, which involves accurate home appraisals. Artificially inflating the value of homes could lead to increased risks and ultimately negatively impact their loan portfolio.
Conclusion
In conclusion, the home appraisal process is designed to be independent and impartial. Appraisers play a crucial role in providing an objective assessment of the value of a property based on market conditions. While supply and demand are the primary drivers of home prices, banks and appraisers must adhere to strict regulatory standards to maintain the trust and reliability of the housing market. The emphasis should be on understanding the complex interplay between market forces and professional regulations rather than attributing blame for rising costs to a single factor.