Yesterday marked the start of what I would consider one of the slowest news weeks I've seen in my four-plus years with Big Builder. No news coming out of builders and no economic data releases. So, I got to spend my day working on a story that I had started some time back but had never finished on the heartburn builders were having over appraisals. Many builders were telling me that they were watching deals fall apart because appraisals often were coming in well below what they considered fair value for new homes.

(Have to say that I'm glad I did it yesterday because The Wall Street Journal came out this morning with the article "Appraisals Roil Real Estate Deals," which offered a consumer take on how appraisals are becoming one of the biggest obstacles to selling a home today. Note the article requires a WSJ subscription.)

Now, the issue has been around for awhile yet, but I think it's really coming to a head now that the Home Valuation Code of Conduct (HVCC) has gone into effect as of May 1. The code essentially forces lenders to follow new rules to ensure greater appraiser independence if they want to be able to sell home loans (other than the government-insured variety) in the secondary market to Fannie Mae and Freddie Mac.

But whereas the new code attempts to protect appraisers from being pressured to inflate home prices, home builders have complained that they are doing the exact opposite and driving down prices. How? Appraisers are using short sale and foreclosure sales as comps. This e-mail from a builder based in Chicago pretty much sums up builders' gripe:

"One of the problems coming out of this is that the appraiser isn't forced to consider the condition of the home. If the home costs $40,000 just to get the home into living condition, that's not taken into consideration. This will worsen price erosion, and we are beginning to feel the effects of the new code. It's not good, and we don't like it!"

I spoke at length this morning with Lora Heramb, a vice president of sales and marketing with Brookfield Homes, on the subject. To say that there was a high degree of frustration would be an understatement.

"To compare a brand new home with everything we put in it to a foreclosure or short sale, it just doesn't make sense to me," she said.

The problem, said Heramb, is twofold.

1. From what she sees in the San Diego market, most appraisers when evaluating a newly constructed home don't take into consideration some of the products, technology, and building science that goes into new homes. "We get no valuation for increased energy efficiency compared to old homes," she noted as an example.
2. She said while appraisers have a chance to go in to physically view a new home (generally twice--once before the flooring is installed and once after), they most often are comparing what they see against closed escrow numbers. "They never have been in the homes that they are using against--and I say against--this new home. They don't know if the cabinets are still in, if the owner put holes in the walls, if there's cat hair in the carpet--it's a closed number," she explained.

Now, I never really thought appraisers should just automatically throw out short sales and foreclosure sales from their comps. If those constitute the bulk of the transactions in a market, they can't just ignore then--particularly in markets where a lot of the foreclosures are homes built less than five years ago. But I think Heramb--and numerous others, for sure--made a valid point. There's no check or balance in place to ensure that a transaction value is matched up to a level of quality. And there should be.

But for as much pain as there is these days when it comes to appraisals, maybe the deflationary trend is more the symptom rather than the sickness. Many home builders have suggested--and yesterday the claim was more or less validated during my interview with a spokesperson for the Appraisal Institute--that the low-ball valuations stem from the simple fact that many appraisers are low quality. Because many are inexperienced, they try to hedge their lack of expertise by placing a lower value on a home.

Because many appraisers today lack the construction, design, and local market knowledge, Heramb said, the burden then falls on the home builder to provide the necessary documentation and education to help them arrive at what many builders would call a fair valuation. "I know my sales agents are all educating appraisers," said Heramb. "Because many of them have never been in the communities before."

My eyebrow shot straight up when I heard that. Wasn't the whole point of the new appraisal code to ensure that appraisers made independent decisions as to valuations?

"If that was their goal--to have them have no information--it's not working. It's not what's happening in the field," she said.

So, it's quite evident, at least to me, that we've got a prime-time problem. But the question is what can we do about it? There needs to be more qualitative analysis. But how? More rules and regulations? I don't know.

Already with the new code, we've in a way regulated ourselves back into the problem we were trying to prevent--appraisers being pressured to inflate values by people who benefit from higher values. If what Heramb said was happening is in fact happening on any scale, that's a problem. Any way you slice it, for as much as loan officers, mortgage brokers, and real estate agents had an interest in higher home valuations in times past, home builders surely have an interest in the valuations, particularly today.

Of course, when I say that, I don't mean to suggest that home builders everywhere are trying to fleece appraisers into assigning unrealistic values to their homes--new homes, with all their bells and whistles and pristine conditions, deserve to be evaluated more fairly. I'm just saying that I don't think it should be the builders' sales staffs who are tasked with educating underqualified appraisers.

So, tell me what you think should happen to solve this problem. You can either give me a ring at 202.729.3563, e-mail me at syaussi@hanleywood.com, or, for you social media mavens, send a tweet to @BigBuilder.