Let me admit to one very important fact…I am old. At least I assume I am since I am over 60. In any event, much of what I know about the cyclical nature of real estate is not based on any scholarly papers I have researched and presented, but rather it is due to the fact that in my professional career I have seen four different downturns in real estate and from that I have gained what is known as real world experience. In other words, I am old, but my memory still works.
Here are just a few indicators that I watch when trying to decipher if something in the real estate marketplace is so out of whack that it could be a sign of impending trouble.
· Property is selling for above replacement cost even though there is plenty of available land for new, competing development.
· There is an increased risk of some kind of global cataclysmic event which would panic the credit markets and threaten liquidity.
· Interest rates are extremely low due to manipulation by the Federal Reserve or general global anxiety which results in a flood of capital coming into US government bonds.
· One or more basic industries are under severe pricing and profit pressure due to change based on the evolving use of technology and the impact that has on consumer behavior.
· The number of active real estate agents and brokers is growing and is close to what it was just before the last downturn.
· Loan underwriting standards not directly related to consumer credit are easing – like when down payment minimums shrink or when appraisal integrity/quality is threatened.
· It’s been close to 10 years since the last downturn since my experience tells me that institutional memory only lasts about 10 years, no matter how painful the last crisis was.
· The US is experiencing some new kind of domestic turmoil causing anxiety and uncertainty. If nothing else, I think the Presidential election qualifies.
· The greed factor is back and is being worn proudly as a badge of honor.
I’ll let you go down the list and decide for yourself if the real estate market is approaching another “correction” as the pundits like to say. My opinion is that there are numerous US markets exhibiting “bubble-like” symptoms and that concerns me.
Now, looking just at the issue of appraisal integrity/quality, here is what triggered the writing of this piece. In early April an appraiser I know and have the highest regard for sent me a copy of an email solicitation from a national appraisal management company (AMC) asking for appraisers to perform “Interior Property Inspections” for $25-$30. I will not name the company since I believe this company is not the only one soliciting licensed real estate appraisers for this kind of work without any regard for whether this kind of assignment might be a per se violation of USPAP and/or not be covered by the appraiser’s Errors & Omissions Liability Insurance.
Once I read the solicitation I called the company in question and left a message asking someone to call me back to discuss what they were thinking when they sent this out. When nobody returned my call, I emailed the company again asking for someone to get back to me to offer their perspective on this mass solicitation. This time the company sent me the canned reply designed for an appraiser who asked for more information. The company was kind enough to send me a copy of the form they expected an appraiser to use when completing the “inspection”.
I won’t go into great detail here, but let’s just say the questions an appraiser is asked to complete about the condition of the interior and (surprise) exterior of the property read pretty much like a home inspection checklist. If you are in a state that requires home inspectors to be licensed, then doing this “inspection” may be in violation of your state’s licensing laws. In addition, the appraiser is asked to answer a battery of questions about the overall neighborhood’s condition in a way that pretty much screams “redlining” to me. For example, one question asks if there are “any negative neighborhood influences that would have an impact on Subject’s value?” This doesn’t sound like an interior inspection to me and it clearly asks the appraiser conducting the “interior inspection” to begin offering opinions on what would clearly drive a conclusion of fair market value.
This is not the first mass solicitation of appraisers by lenders or AMCs, nor will it be the last, where appraisers are asked to swallow their pride, perform a task that may not even be permissible, and work for peanuts just to make a living. This is why I believe we are entering a period where the integrity and quality of the work done by licensed real estate appraisers is being discounted by a loan underwriting system that can only survive if volume hits a high enough level to be profitable. To the lenders and AMCs pushing the use of these limited scope reports, I say “what are you thinking”? To the appraisers who accept these assignments and complete these reports, I say “why would you jeopardize everything you have worked so hard to accomplish for a few dollars”?
Does this mean the apocalypse is upon us? No, but it sure is getting closer every day and if I were a squirrel I’d be stashing nuts in every nook and cranny so I was ready for it when it arrives. After all, I am old and sometimes being old is better than being simply smart. Be smart out there and watch your backs.
Author: Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.