A free market should determine the value of a good or service based on the elementary principle of supply and demand. A good or service is worth what a person is willing to pay for it on an unstressed open market. Real estate doesn’t seem to work as simply due to the fact that most homes are purchased through a financing program, thus, the “free market” is cluttered with multiple purchasers (the borrower and the financier). Usually, a home buyer must borrow money to be able to afford an assest as large and expensive as a home, but before the bank shells out in upwards of 80% of the “value”, said bank wants to make sure they are covering their asses by lending on a “safe” asset.
On May 1, 2009, the rules of appraising property changed. Now, lenders that sell loans to Fannie Mae or Freddie Mac are required to set up a firewall between appraisers and loan officers to prevent improper influence. The rules are the result of an agreement between the mortgage buyers and New York Attorney General Andrew Cuomo, who said an investigation found appraisers inflated values under pressure from lenders. Buyers and real estate professionals are finding that many of the most recent appraisals are coming up short of what the buyer is willing to pay for a home, thus, limiting the amount of financing the bank will provide.
We want to hear from you, real buyers and sellers. What do you think a home should be worth?
this is a tough one for me because i’m a big believer in free and open markets and i think that if somebody is willing to pay a certain dollar amount for a good or service, than that’s exactly what the good or service is worth (to that person at least). i’m also a believer in bank regulation and i understand the purpose of an appraisal. i think there needs to be appraisal guidelines and standards and i think that banks should use a framework or formula when deciding weather or not to accept an appraisal. clearly, a lender should not lend if nobody except the buyer thinks an asset is a particular value, but there is a bunch of grey matter in between. if a buyer and a seller agree upon a price and some independent person disagrees with the price finding… why does that persons opinion stand? tough one…
If I were a lender, I would have two concerns when choosing an appraiser.
First: I don’t want price that isn’t real (see corruption of the last few years)
Second: I don’t want overly conservative pricing either… since I actually make money writing loans.
Things are crazy right now but the market will adjust by itself.
Even if the buyer is willing to pay more for a house, lenders can agree to provide mortgages that will cover only the appropriate % of the appraised value. This way – the buyer is responsible for coming up with the ‘premium’ over the appraised value. The mortgage should be viewed as separate from other loans as it is entirely banking on the value of the house, and not the price of purchase.
@AM—well said!