Home prices have been going up month after month. In fact as of March 2016 home prices have risen for 49 consecutive months and I wouldn't be surprised to see April 2016 make it 50 consecutive months of rising home prices. Home prices are projected to increase another 5%, on average, this year. Obviously this is great news for home owners and home sellers. Less so for home buyers, many of whom are finding it increasingly difficult to find an "affordable" home.
There's also a major negative effect on both home sellers and home buyers because of increasing prices ~ that being that homes are not appraising at their contracted prices, as appraisers are experiencing difficulty in finding adequate, comparable sales against which to measure. And with many areas of the country suffering from significant inventory shortages of homes for sale, a substantial number of homes are selling at over asking price and/or in multiple offer situations, which tend to escalate home contract prices even more.
Houses not appraising at contract sale price are causing considerable delays and/or cancellations in purchase contracts/closings. Statistics from the National Association of Realtors (NAR) show that almost one in five homes are experiencing a delay in closing due to appraisal issues, while one in 11 contracts are being cancelled due to appraisals.
No doubt there is major disappointment for home sellers when contracts are cancelled often having a "snowball" effect, as many sellers can't buy the next home (for which many already have contracted) if their current home doesn't sell due to contract cancellation or at contract price.
As for home buyers, it's worth pointing out that by the time there is a rationale to cancel a home purchase contract due to appraisals, buyers are out-of-pocket not just for the cost of appraisals, but the cost of inspections, cost of loan applications, due diligence fees, etc. No one walks away "scot-free" when a contract for the purchase of a home is cancelled.
The graph below from Quicken Loan's Price Perception Index (HPPI) shows the disparity between appraisers' home value opinions as compared with home owner' perception of the value of their homes. The disparity was particularly notable in August and September 2015, but then fell back a bit until March and April 2016 when it increased again.
Currently the difference between an appraiser's valuation of home and a home owner's perception of value is just over 2%. While that might not sound high in percentage terms, it can be significant in dollar terms. Many first-time buyers are unable to "fork over" the difference in cash to make up a difference in the financeable amount of a loan and the contractual price. For higher priced homes, the dollar difference can be high and many home buyers simply won't or can't justify coming out-of-pocket for the difference between financeable amount and contract price.
WHAT DOES THIS MEAN FOR HOME SELLERS & BUYERS?
Whether you're buying or selling a home in today's market, you need to work with a real estate professional who can help guide you towards an optimal asking/purchase price based on "real" market conditions. Being realistic about the selling/purchase price will help ensure that your home purchase/sale is not delayed or that your contract isn't cancelled completely.
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