A Sign of Home Value Recovery?

Catherine Ellinwood with Fairway Independent Mortgage (520-954-1907) sent me an email this morning saying the market's looking good because interest rates are low and "values are coming in under purchase price." The first part sounds good, but to me, the second part didn't.

When a property appraises for less than the price in the purchase contract, this is bad news to me, because the buyer can't get a loan for the purchase price. One of two things has to happen: the seller has to reduce the sale price to the appraised price, or the buyer has to pay the difference between the sale price and the contract price as additional down payment. The seller usually doesn't want to do this, and the buyer often is unable.

Catherine explained that when the contract price is more than the appraised price, it means buyers are willing to pay more than what the comparable sales would indicate the house is worth. This is how prices went up so quickly from 2003 to 2006.

Way too many of the comparable sales on appraisals today are distressed sales. These sales drag down the value of non-distressed properties. Now that buyers are realizing that there are bargains in this market, we are seeing bidding wars and serious offers. This renewed interest from buyers is bringing the sale prices up.

When the appraisal is lower than the contract price, cooperation between the seller and buyer can keep the sale on track. If the seller reduces his price a little, and the buyer brings a little more cash to the table, the house can sell for more than the appraised value. Although they may not feel like winners when making these concessions, this is a win-win situation. The seller sells, the buyer buys, and when the house has a new owner, everyone realizes that they got what they wanted.

When prices start going up (sloooowly, this time), fewer homeowners will be underwater, and more will be able to sell or refinance. Then we can start climbing out of this worrisome housing market.

The low rates Catherine referred to were 5% with 0 origination fee, or 4.75% with 1% origination fee for FHA loans. Conventional loans are a little higher. Ask Catherine about Fairway's contribution to the buyer's closing costs.