When an economic slump hits an area where home builders have been throwing up expensive houses like there's no tomorrow, the overhang of existing housing stock is going to hurt new-home sales, probably for years. Las Vegas is a textbook example.
Today, "worth" isn't determined by an agreed-to sales price, regardless of whether the price reflects what was spent to build the home.
Let's say a builder and buyer agree to a $210,000 sales price on a new house, and the buyer needs a loan to close the deal. If a nearly identical house across the street just sold for $120,000 on a short sale, and a trashed, abandoned model down the street just sold at auction for $92,000 after being foreclosed, the new home that both buyer and seller value at $210,000 will appraise at a much lower price in today's market. At that point, the bank or mortgage company will sharply reduce the amount they're willing to loan.
Hanley Wood housing analyst Jonathan Smoke estimates foreclosures and short sales can now affect net pricing of new homes in a submarket by as much as $90,000.
Ryan Smith, sales manager for Shea Homes at Ardiente, says he sits down with each appraiser and educates them about his product's energy-efficient features and "green" building techniques that might otherwise be overlooked in the appraisal process.
"It's been tough," Mr. Smith admits. "We had one appraisal come in low, and the buyer agreed to bring in cash to close on the home," he said. "The underwriter for the lender has to challenge the appraisal and open it up to a board of appraisers, have them examine the appraisal and look at the properties used as comps."
Real estate appraiser Ronald James of James & Associates insists the market -- not the appraiser -- dictates new home values.
Says Bob Denk, economist for the National Association of Home Builders: "We've got one-third of our builders reporting they lost a job because the appraisal came in too low thanks to foreclosures. They've had a hard time getting financing related to the downward pressure on prices because of foreclosures."
Banks expect to lose about 40 percent on foreclosed properties, but in these horrible times, they're "taking it on the chin" to the tune of 60 percent discounts, Mr. Denk reports. "I'm sorry to say Las Vegas is the leader in this statistic," he notes.
Builders and home sellers can try to educate appraisers about their properties, as Mr. Smith suggests. Those who can afford multiple appraisals can attempt to do some "cherry picking."
But to a considerable extent, appraisers are merely delivering the news that a lot of people don't want to hear: With out-of-town investors picking off distressed properties for less than $100,000 and a recovery looking sluggish at best, cash is now king. And high down payments, "carrying the paper," and a lot less help from the overextended financial industry may just be the new normal for some time to come.