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015 Leonard Nakamura, Vice President & Economist, Federal Reserve Bank
We all know what commercial real estate appraisals are and that they are primarily a tool used by banks once a buyer goes into escrow on a property. But did you know that there is evidence to show that, at least in part, appraisals can contribute to house price bubbles and exacerbate downturns? Prior to the recent 'great recession' a preponderance of appraisals came in above contract pricing. This helped the market to climb faster, perhaps, than it might otherwise have done. In May 2009, a set of guidelines took effect known as the HVCC - the Home Valuation Code of Conduct - that sought to ensure arm's length relationship between lenders and appraisers.
The intent of these guidelines was to mitigate the risk of appraiser conflicts of interest, but, well intentioned though it was, one result was that appraisers became overly conservative and a greater proportion of appraisals started to come in below contract prices. This led to a greater number of properties failing to find financing, contributed to a decline in liquidity, and contributed somewhat to the downturn.
In today's podcast, Dr. Leonard Nakamura, Vice President of the Federal Reserve Bank of Philadelphia, explains the background to this phenomena from the perspective of his agency.
Listen to or Watch the Full Podcast Here
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