By Mike Bodeen · 1 March 2021
The current Phoenix Metro real estate appreciation is about 22% (based on the annualized monthly price per square foot). This is similar to 2004 which was one of the highest appreciation years in Arizona’s history (over 45%). That may change. The chart below shows the sudden rise back in ’04 to ’05 and the now sudden rise happening in late 2020 into early 2021.
We’ve discussed previously why those years are not these years.
Fundamentals of our local economy are strong – more diversified
Unending migration from parts known and unknown.
Over 75% of buyers buying to live in the home versus the speculative market back then.
Insufficient housing supply to handle the demand.
The rapid appreciation in our now-frantic market is causing headaches for buyers, their agents, and appraisers. Previously, there was always the question of whether or not the home would appraise for the asking price. If the home didn’t appraise, the buyer and seller would often renegotiate the price to the buyer’s benefit. Not so much now.
When a buyer makes an offer to a seller where a new loan is involved, the contract normally stipulates that the contract is contingent on the lender’s appraisal meeting or exceeding the purchase price. No problem there, right? Not anymore. Because there are multiple offers on most homes, buyers are being very aggressive!
What happens if the appraisal doesn’t match the price? Ahhh, there is the rub. The buyer must come up with extra cash to make up the difference between the loan amount and the purchase price. Since buyers are having to compete with many others, some are waiving the appraisal contingency while offering well over asking price. That strategy effectively locks out many buyers as most don’t have the extra cash lying around to increase their down payment if need be. It eliminates first-time home buyers.
And appraisers? The rapidly rising values are not giving them comparable sales close to the sales price. So, the appraiser could appraise a home for less than the negotiated sales price and the buyers must pay the difference, or default, losing their earnest money deposit.
Example:
$500,000 Asking Price
$100,000 20% Down Payment
$400,000 (New First Loan)
Buyers Now Bid Up price to $550,000
$550,000 New sales price
$110,000 (New Down Payment)
$440,000 (New First loan-80% of $550,000)
$500,000 Lender Appraised Value – $50,000 less than sales price
$400,000 maximum amount loaned to borrower (80% of $500,000 appraisal)
New Down Payment Needed
$40,000 Additional Down Payment now needed to make up the appraisal shortfall difference
In time, as values stabilize, appraisers will have sufficient comps, but in the here and now, not so.
How much does it matter? Well, it doesn’t matter to the seller so long as they get their higher price. It doesn’t matter to the appraiser, as they should still be appraising based on the comparable sales. It matters a lot to the buyer, as it requires extra cash. And unfortunately, it means a whole lot to the buyer who can’t compete on the same level to actually get their offer considered.
And that really matters!