In an effort to improve a flawed housing appraisal system, NAHB has been reaching out to key stakeholders to find common ground on potential reforms.
As part of that effort, NAHB Chairman Bob Nielsen addressed the Appraisal Institute, the leading trade group for the appraisal industry, in August during the institute’s annual meeting in Las Vegas.
“The appraisal industry carries a heavy burden regarding the condition of the U.S. economy,” said Nielsen.
“We have learned over these last few years that the way homes are valued can have a dramatic effect on home owners’ mortgages, foreclosure rates, the health of banks and, ultimately, the condition of the U.S. financial system.”
Nielsen emphasized homebuilders’ concerns that the inappropriate use of foreclosed homes, short sales and other distressed properties as comparables in appraisals is driving down the prices of new homes.
“By definition, distressed properties are not comparable to a new home,” Nielsen said. “They are fundamentally different.”
Nielsen noted that new homes are built to current codes, are often significantly more energy-efficient and “green” than older homes and they include a range of modern amenities and design elements that buyers value and are willing to pay a premium for. They are also in excellent condition and are move-in ready.
Distressed properties, on the other hand, often have suffered significant damage from theft and vandalism. Almost always, they have deteriorated as a result of neglect and deferred maintenance.
“All distressed properties suffer from a perception that any or all of these conditions may have diminished their value,” Nielsen said. “Their value has declined as a result of that perception.”
Another problem for the residential construction industry is the way that green building features — especially energy efficiency improvements — are evaluated by appraisers, Nielsen said.
FHA provides a mechanism by which the value of energy improvements can be added to the mortgage amount.
But little work has been done in this area by secondary market investors or appraisal trade organizations.
“A new home may have wider studs, extra insulation, a high-end HVAC system, solar photovoltaic cells, energy-efficient appliances and other energy efficiency systems — a whole range of improvements that add to the cost of a home and provide real value to the buyer over time,” Nielsen said.
“But if the appraisal industry is not recognizing that value, then it hurts our buyers and our industry and discourages the use of ‘green’ features that benefit us all,” he said.
“As green building becomes more prevalent, there is an urgent need for the value of green building and energy efficiency to be appropriately recognized in the appraisal system,” he added.
Nielsen thanked the Appraisal Institute for its leadership in developing guidance for appraisals of homes that include energy efficiency upgrades and other green features.