As somebody who lived in Northern California in the communities which first started spiking in the early 2000's, I've always had a pet theory from the time.
Housing Appraisers realized they could tack on $10k per house when appraising, and they realized that nobody would stop them. Realtors loved that because they got more commission, buyers realized that houses were going up fast so they'd better get in while they could, appraisers got called back more in a tight market and everybody made money. There were *no* controls on the appraising.
Still remember how when I bought my house, there was a clause for 'if the house appraises under X, buyer will pay up to Y out of pocket to match the difference' (This was to help make the offer 'stronger' according to realtor.)
Lo and behold, my house magically appraised exactly for X, despite it likely being more like X-5,000 based on realities and other sales in the area...
At least in my state there is no incentive for appraisers to do this. 99% of appraisals get assigned to random appraisers. There is no such thing as “repeat business”, at least within the realm of your typical home sale where the buyer is financing through a bank.
In California, at least at the time, Realtors called the Appraisers they knew could be a little generous with the numbers to make the clients happy. Speed-dial. Inflated numbers were easy to make plausible, and as time went on, the cycle became self fulfilling.
Appraisers knew this, they got lots of easy business for an afternoon's worth of work, and grew their businesses. Realtors would shrug and say "That's what it appraised at." Banks were happy. Sellers were happy. Lots of money. There was no natural regulation or push-back stopping any of this.
Source: friend made lots of money doing this at the time. They probably made out better than the Realtors.
Yea I believe that. In my state (Georgia) the randomization rules only came about after the '08 crash. I come from a family of appraisers, oddly enough, so I have an unusual amount of insight into the industry for a simple software engineer. Prior to the new rules my family's company had a set of clients (banks) that they would get business from, and they had to reach out and do marketing/sales/shmoozing to get new clients, like any other service business.
After the new rules, banks just bid for an appraisal into a black box and it gets fulfilled ~randomly. The family rolodex became pretty useless. So the playing field was leveled, and it's certainly a fairer process with better overall results for homeowners, but it also kind of neutered the whole appraisal industry since there's not really a good way to compete anymore.
Kind of going on a tangent here, but the appraisal industry is one of those "silver haired" industries that is not able to replace it's older workers who are retiring. It's unclear what the future holds for appraisals, but it seems inevitable that there will be some sort of pivotal change in the industry in the next decade or so.
> Appraisers they knew could be a little generous with the numbers to make the clients happy
This can only work if only very few appraisers in the area are overvaluing. But if that works, why wouldn't all of them get in on the game? And if most of them do, it falls apart because the actual sale prices will be out of line with the appraisals. So, it doesn't really work outside of edge cases here and there.
There are definitely laws and lender requirements that should make appraiser selection somewhat random and their findings somewhat neutral, but based on my house buying experience I don’t believe for a second that they’re effective. We made a bunch of offers and somehow the appraisal was always right at the offer price or ~5-7k above. I’m convinced that the appraisers somehow have knowledge they shouldn’t and covert/indirect mechanisms exist to motivate them to play ball to make deals go through.
Besides small sample size giving me a skewed sample, the other explanation I can think of for this is that appraisal is a fairly exact science and realtors have mastered pricing based on it. Considering the volatility of my market, lack of comparable sales, and the IQ of the realtors I’ve met that seems laughable.
> somehow the appraisal was always right at the offer price or ~5-7k above.
Yes, this is pretty normal. Contrary to popular belief, appraisers don't have any sort of special data or processes that allow them to determine the exact value of a house in any given market (because such a value does not exist). An appraiser is working for the bank and simply serves as a risk mitigation officer. Their job is not to answer "what is this house worth?", it's to answer "is the deal you're lending money on within reasonable bounds?". So when the appraisal value comes in at or around the sale price - it's just a simple "Yes". And when it comes in somewhere else, it's a "No".
There is generally zero incentive for an appraiser to inflate prices (today, this was not always true in the past).
The housing market is vast and complex, without question. And still, the reason that prices go up is overwhelmingly the simple fact that buyers are willing and able to pay those prices.
The banks got greedy, realized their mistake, and then promptly blew up the market on purpose. The secondary effects were not the drivers of the crisis. This is one of the most documented and unpunished crimes of the century.
The best part: it may well not have been illegal. The economy is a constant cycle of upswings caused by new forms of crime, followed by a crash and then new laws. They then set out to research new forms of crime.
There was lots of legal activity that added to the size of the crisis. You'd be naive to believe that everything else was perfectly above board.
> economy is a constant cycle of upswings caused by new forms of crime
"The economy" as a concept is not. The current US economy certainly does seem to be dominated by criminal activity and has been for 30 years or so now. The connection of the Internet and financial markets were not a strictly great idea.
> followed by a crash and then new laws.
Laws also get repealed. Like Glass-Steagall was.
> They then set out to research new forms of crime.
I posit that they don't. They enjoy a monopolized economy in an incredibly deregulated market. They take whatever they can take until they get caught. Our justice department happily negotiates a settlement and sweeps the whole thing under the rug.
This isn't just a clever scheme. This is nearly complete and total government and business corruption.
Taxes are suppose to keep this from going out of control. but the only way to appeal a tax appraisal increase (here in Washington) is to use OTHER home values in the area that are similar, but less.
Mortgage appraisals are far higher than the local tax appraisals which seem to run 20-25% lower than say Zillow says. Local tax appraisals are also typically only updated once every 10 years or so (depending on the jurisdiction).
Besides, I think these days the appraisers don't actually do appraisals, they just look at Zillow.
The people that do appraisals for property tax assessment reasons may be the most disliked people in municipality. My opinion is that it makes no sense for people to be doing it anymore. It should be strictly algorithmic with very few input variables.
I kind of wonder if there could be some kind of antagonistic pricing checks, by finding parties opposed to inaccuracies.
For example, actuaries have to be accurate about the costs of using a vehicle. If their estimate is too low, the insurance company will lose money. If they are too high, they will lose business to competitors.
But probably insurance companies are not the opposed party, because they will sell more insurance, and losses may be lower than inflated costs.
On a different note, california prop 13 has made people keep their house longer or forever.
Also you don't need a proposition in your constitution to affect the same outcome. Where I live they almost never do reassessments, so we effectively have the same result.
The great thing about having states is that we can experiment with lots of different models of how to run society. If you don't like your particular, society then you can move to a different one.
Residential zoning laws in most California cities (and frankly, across the country) do no favors either. They're tuned tightly to encourage home values to go up not to stabilize the cost of housing and maximize housing accessibility.
This strictness is the backbone of what allows everything else to happen. There's no market dynamic - because cities (or more specifically, city residents) don't seemingly actually want a functional real estate market for a variety of reasons - therefore there is no way for enterprising developer to come in and build and sell at a price target they look to set.
Instead, it all has to go through this machinery as you describe. It has always been ripe for exploitation as a result.
Laws of geometry have nothing to do with it when zoning laws and other regulatory hurdles are the real barriers. Real estate is an in incredibly artificial market. It has none of the characteristics of a regular marketplace
Appraisers don’t set prices, though. In my purchases and sales, they’ve only been involved after an offer is accepted and the lender wants to be sure that their collateral is worth what it needs to be. Even if some people are using appraisers to set their asking price, that doesn’t mean buyers will offer it.
The network effect of the prices going up seems to permit the appraisers to add their bumps up as well. I don't think it's as influenced by appraisers as some think, and it might vary by region a bit. If prices in a region are rising (for a number of factors) I don't think many appraisers are going to round down in their judgements.
Sure. There’s no objective value of a house, so they have to go off of recent sales of similar properties. If prices go up, appraisals go up. But I don’t see how the reverse would be true, as suggested above.
Appraisals also act as a gate for prices due to lender requirements. A bit round about, but I can see how looser appraisals can enable inflated prices. Imagining the opposite extreme is interesting: What if appraisals never returned with higher prices than the last sale of that house? Some markets would see increases from people paying the difference out of pocket, but I’d guess the rate of price increase would be much lower. (plus other effects, of course).
The value of a property is whatever it can sell for. Models and assessments attempt to figure out that number without actually performing a transaction. An accurate model will account for the same factors a buyer will use to decide what to offer, but ultimately it’s down to what people will pay. If that number goes up 2x, there’s no model that can tell you that increase is somehow incorrect, or that the true value is lower.
I've explained this before but the players involved don't really care. The bank just wants to make sure they aren't on the hook for a worthless shack. If the appraisal comes back inflated by 10-20% that's fine. The goal is to prevent loaning $1.4m against a house worth $700k.
I mean this is true, but I think its more realistically like the appraiser doesn't want to create a situation where it tanks a sale if they can avoid it. When I bought my house in 2022 there was a bidding war (like every house sale in Seattle), I paid 150k over asking price which was relatively speaking pretty reasonable as the other houses I bid on went for 250-500 over.
That said it was on the very high side of valuation. My agent told me if the first appraisal wasn't enough to cover the purchase price, we would just get another appraisal. The first appraisal went fine, compared to other properties it was within range of reasonable so they approved it and the mortgage went through without issue.
Housing Appraisers realized they could tack on $10k per house when appraising, and they realized that nobody would stop them. Realtors loved that because they got more commission, buyers realized that houses were going up fast so they'd better get in while they could, appraisers got called back more in a tight market and everybody made money. There were *no* controls on the appraising.