Faulty Appraisals Hurting Builders, NAHB Says

Washington, DC, Dec. 9, 2011 -- One out of three builders said they lost signed sales contracts during the preceding six months because appraisals on their homes were less than the contract sales price, according to a recent nationwide survey conducted by the National Association of Home Builders.

"The inappropriate use of distressed and foreclosed sales as comparable in determining new home values is needlessly driving down home prices, killing home sales, causing more workers to lose their jobs and delaying a housing and economic recovery," said Bob Nielsen, chairman NAHB.

Too often, NAHB said, due to faulty appraisal practices, brand new homes with new appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair.

The result, in many cases has been that the new house winds up getting appraised at less than the cost of construction.

Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home.

"This is not only unfair and unreasonable, but it perpetuates the cycle of declining home values, drives more home owners underwater, harms local economic activity and acts as an obstacle to the recovery of the housing market," Nielsen said.

These appraisal practices are a major contributing factor to the current acquisition, development and construction lending crisis that has choked off credit for home builders and threatens to prolong the current housing downturn, NAHB said.

Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans.