John Tedesco, SVP of Business Development at Appraisal Nation
The appraisal industry has been under a great pressure for several years now. Increasing demand, shrinking pools of aging appraisers, evolving data and technology, growing regulations, and difficult entry barriers into the profession, are just a few of the items that have contributed to the current climate over the past 10yrs. Now add the impact from the Covid-19 pandemic and the industry challenges expand even further. The impact is being felt by mortgage lenders and borrowers across the nation and they will need to navigate these concerns in the new world.
At Appraisal Nation we are in a unique position as a leading nationwide AMC (Appraisal Management Company). As one of the premier mortgage service providers in America for real estate valuations we work with over 26,000 appraisers, 1,400 national lenders, and over 6,000 independent mortgage brokers as we perform 150,000 residential and commercial appraisals annually across all 3,143 counties in America. We also work close with federal regulators, state licensing boards, numerous industry associations, along with institutional and private capital investors to understand key critical needs and key touchpoints impacting the industry. This gives us both a broad and deep perspective on changes related to real estate valuations.
First let’s talk supply and demand; the key pressure on the industry. With Millennials becoming the largest generation in American history housing demands are at an all-time high both for the Single Family and Multi-Family Rental markets as well as first home owners. The National Association of Realtors is predicting 12 million new home owners over the next 10yrs. The second biggest generation, Baby Boomers, are starting to downsize. Both the selling and buying in there transactions typically require an appraisal; granted large portions of the selling may overlap with many of these Millennial home buyers. Additionally, interest rates are at an all-time low driving a refi boom and also requiring valuations in many cases.
The 2019 Fact Sheet from the Appraisal Institute (AI) highlights 79,000 active appraisers in America. Less than 50% of those are active residential field appraisers; meaning many other may work for an organization like ours full time doing quality control or review work, serve as Chief Appraisers for public and private organizations, work directly on staff for a lending institution, or perform only commercial asset class appraisals. The AI Fact Sheet notes several other important facts. First, that number of active appraisers is down more than 10% in 5 years and has been on a steady decline for more than 10 years. The average age of an appraiser is now over 55. More than 50% of those have been in the industry over 20 years while less than 16% have entered the industry in the past 10 years. Nearly 41% of appraisers surveyed in 2018 by the National Association of Appraisers responded that they plan to retire in the next 10 years.
All of this is exacerbated regionally. Rural areas always have dramatically underserved by appraisers by nature of lower populations, but even cities and states can deviate significantly. Clearbox, host of the annual Valuation Expo (largest for the valuation community) reported in 2017 that metro Atlanta has 60 appraisers per 100,000 people, San Fran had 30, while Cincinnati had 14 for 100,000 metro residents – and shrinking. In Illinois their state appraisal board reported nearly 1,500 new trainee licenses issued in 2005; just 53 ten years later in 2015. Following the housing market recession of 2008, increased regulations, added risk, and stagnant fees had compounded with added education and trainee requirements to deter many from entering the industry.
This supply and demand pressure has been dramatic and painful to lending across America. Initially it has added costs to appraiser fees and delayed turn times; extended times that killed rate locks and delayed closings and added to loan expenses. In recent years the impact forced federal agencies, lenders, and key decision makers to take measures to combat the challenge. Some measures pushed to increase supply with reduced barriers to becoming an appraiser trainee; scaling back the added education requirements and field hours. Other measures focused on reducing demand.
In 2017 and 2018, Fannie and Freddie adopted and expanded waiver policies that allowed low risk borrowers with previous appraisals on file and higher down payments to secure appraisal waivers. In 2018, Fannie reported 60,000 of their 1.2 million loans (5%) received a waiver. Other exemptions from the Federal Reserve and FDIC were put in for commercial properties under $250,000 and then in 2018 that was raised to 500,000. In 2019 the FDIC raised the residential exemptions from $250,000 to $400,000 and required alternative valuations for items below that. These were for non-GSE loans and in September of 2019 HousingWire reported these waivers represented 750,000 residential loans in 2017; the updated threshold based on based on that 2017 data would have added an additional 214,000 appraisal waivers. Government entities also started using bifurcated reports, or what many of us know has hybrid reports (although technically there are some differences). These reports allow the appraisers to complete key portions of the report from home while other methods can be used to acquire photos and inspections.
As we entered 2020 those changes were still being significantly outpaced by the growing demand from new home buyers, low-rate refi’s, and new construction. In addition to the conventional demand the rapidly growing demand from private capital investors acquiring residential assets through Private Lenders, REITS, Family Funds, Institutions and more has surged. In 2005 it was projected that this represented 5% of all residential lending in America; many experts suggest that number has grown to closer to 12% to 15% today. Further, these private lenders who fund investors with fix&flip loans, rental loans, refi’s, bridge loans and more have seen a dramatic boom in recent years with the emergence of a secondary market.
In March of 2020 ATTOM Data released their 2019 Home Flippers report where they reported an 8 year high with over 245,000 homes flipped in America in ‘19. That alone represented 6.2 percent of all lending in America for $32.5 billion in Financed Flips in 2019. Rental programs were even stronger in 2019 for these private lenders and had more than doubled in recent years, while public and private REITs contributed even more with greater residential rental asset acquisitions than ever. In 2019 NaREIT (National Association of Real Estate Investment Trusts) reported their 2018 holdings now had 150,000 single family rentals and over one million multi-family units. All of this driving valuation demand.
We are proud to be a leading provider of valuations (appraisals, hybrids, BPOs, evaluations, AVMs) across all these sectors, and in the beginning of March we saw record breaking volume for ourselves and many of our clients. By mid-month this all came to a screeching halt with Covid-19 shut downs. The conventional Spring/Summer house buying flood that normally backlogs appraisers and drives added delays had turned into a trickle; virtually no one was house hunting while quarantined. That secondary market funding helping the private lending boom was now on lock down.
Government agencies like Fannie and Freddie were scrambling to find ways to accommodate the lending that was continuing. If appraisers could enter a home to inspect or even leave their own homes was different state by state, even county by county in some states. Some states deemed them essential workers in line with inspectors and contractors while others deemed them unessential. Exemptions were being made to allow conventional single family interior 1004 reports to be done as an external drive-by reports, and the agencies began allowing lenders to use a desktop report in certain circumstances. GSEs and lenders began evaluating further alternatives as well. We were fortunate to be one of the first to market with our newly developed HomeLink app that allowed the borrowers to use a carefully guided but easy to use tool to take their inspection photos according to all key guidelines, then geo-coded and timestamped the photos, and then send them direct to the appraisers. This became a valuable tool for many lenders.
As states open up we are seeing demand return quickly. We anticipate this will further grow as we reach a full easement of restrictions in all states over time. We feel the backlog from spring volume may just add to summer demand so we are advising lenders to be aware of added turn times and potential fees as appraisers do charge more when demand is greatest. Further we believe this temporary crisis will not have quelled the housing shortage we were experiencing pre-virus. With such demand for conventional home owners and private investors alike the industry will need to continue to address these appraiser issues that impact consumers with significant delays and higher costs.
The pre-Covid exemptions and waivers were easing pressures slightly, but it was still too early to access at what risk to these taxpayer backed agencies. And while we have been seeing great success with our hybrid and alternative valuation products, we recognized they are best used in lower risk scenarios. At the end of the day a computer cannot see non-conforming conditions on a property or smell carpets soaked in pet urine or a nearby waste site that may drive down value. We need to continue to grow the appraiser pool by making it a more attractive profession, limiting barriers, and expanding their tool belt. Alternative technologies, further exemptions, and added tools that emerged during the Covid-19 crisis should be a valuable resource as we continue to grapple with these challenges.
About the Author, and Appraisal Nation
John Tedesco is the SVP of Business Development at Appraisal Nation - Appraisal Nation is America’s leading AMC. As an .INC 5000 fastest growing private companies winner four years in a row, we boast some of the fastest turn times, lowest revision rates and highest rated customer service in the industry.
Appraisal Nation's dedicated team of professionals are ready to do whatever it takes to ensure you receive the highest quality appraisals.