Are appraisers inflating the housing market?

This market is only increasing because appraisers are inflating it. I hear this sentiment quite a bit when mingling, but is it true?

Here’s how the idea works: A superior house sells for more, which becomes the highest sale in the neighborhood. Then an appraiser uses this property as a “comp” for an inferior house (but ignores the upgrades or other blatant differences). The inferior house ends up closing at a higher price than it should have and now becomes a new comp for the rest of the neighborhood.

How do appraisers adjust for an increasing market? This surely happens, but it’s not really how appraisals or the market works. Appraisers actually do have what’s called a “Date of Sale” adjustment to use when the market is increasing in value (or declining). This one line in an appraisal report can be given a positive or negative adjustment (or zero too) based on how values have behaved over time. This essentially means an appraiser does not need a faulty higher sale to “make value work”. For instance, in the image below from an appraisal last month I determined the market increased by 1% since the respective date of contract for each of these comparable properties. I didn’t make the adjustment from the close of escrow, but rather from the date when the sales price was finalized. Ultimately this adjustment was made because all listings were priced about 1% or so higher, and data and conversations with agents also supported the adjustment. What would the result have been without this Date of Sale adjustment? A low appraisal. Keep in mind an adjustment at 1% made sense for this neighborhood, but a Date of Sale adjustment can be significantly higher in some areas (multiple percentage points per month).

This is what a Date of Sale adjustment can look like:

My Market Take: The market is inflated to a certain extent due to external factors like very aggressive investor activity, low inventory and historically low interest rates. In some senses the local economy has improved as unemployment is down, so it makes sense to see some appreciation. Yet in large part the market is being propped up by the aforementioned influences. However, at the same time prices are very affordable and they make sense in many cases (due to low rates) when considering how cheap it is to buy compared to rent. For the most part buyers really can afford the loans they’re getting, which is a difference between the current market and the previous boom and bust. In years to come it might seem crazy to look back and consider the prices buyers were willing to pay, but right now it is a real dynamic that appraisers have to analyze and report.

Bottom (theoretical) line: Appraisers measure the market. They don’t make it.

Questions: Do you hear the “appraisers are inflating the market” argument much? Do you find appraisers to be making “Date of Sale” adjustments in reports you encounter? Are they spot on, too conservative or too aggressive?

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