The National Association of Home Builders (NAHB) reports that one out of every three of its builder members has lost a sale during the last six months because of home values reported by appraisers.  Appraisals are coming in at levels that do not support the sales price, fatally skewing the loan-to-value (LTV) ratios required for the buyers' mortgages.

NAHB Chairman Bob Nielson said, "The inappropriate use of distressed and foreclosed sales as comparables 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."

According to the Association, appraisers are using "faulty" practices, comparing "brand new homes with sparkling appliances and interior upgrades" to distressed properties that have been sitting vacant and deteriorating.  In many cases the result is an appraisal that values the house less than the cost of its construction.

Nielsen said a full 60 percent of builders responding to a recent NAHB survey on the issue said that their buyers had received appraisals that came in below the contract sales price.  More than half of those respondents (53 percent) said that the appraised value was less than the cost of building the house.

"This is not only unfair and unreasonable," Nielsen said, "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 referenced these appraisal practices and the resulting values as a major reason that builders are encountering a credit crisis that is hobbling acquisition, development, and construction.  Lenders have tightened restrictions on these AD&C loans to developers and builders, sometimes not lending at all or demanding additional equity when they do.  There have also been instances of lenders calling performing AD&C loans.  The lack of credit threatens to prolong the current housing downturn according to the Association. 

NAHB said it has held four appraisal summits in the last two years, the most recent on October 19, with federal banking regulators and representatives from the appraisal and housing finance industries, and the real estate and housing sectors in an attempt to find solutions to the problem of developing realistic valuations based on appropriate comparables.  According to NAHB, "With the decline in home prices appearing to have ended or be coming to an end in most parts of the country, resolving the appraisal and credit crunch issues remain a top priority for the association"

"Major reforms in appraisal practices and oversight are needed to ensure that appraisals accurately reflect true market values and don't contribute to price volatility or harm aspiring home owners and move-up buyers," Nielsen said. "We will continue to work with all stakeholders in this debate to find solutions."