Proposed government regulations announced last week by the Office of the Comptroller of Currency (OCC) would raise the threshold for residential real estate transactions requiring an appraisal to $400,000, roiling some experts who warn the new rules, if enacted, could be a job killer.
The joint proposal between, OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, could greatly impact the real estate appraisal industry and boost real estate portals like Zillow and Redfin, which offer online estimates.
“The agencies believe raising this threshold for residential real estate transactions from the current level of $250,000, last increased in 1994, could provide meaningful burden relief from the appraisal requirements without posing a threat to the safety and soundness of financial institutions,” according to a statement from the OCC.
Transactions lower than $400,000 would instead require an evaluation – consistent with safe and sound banking practices – that provides an estimate of market value but specifically does not require a licensed or certified appraiser.
Homes in which transactions are overseen by the Fair Housing Administration, the U.S. Department of Veterans Affairs, the U.S. Department of Agriculture, Fannie Mae, and Freddie Mac are subject to a certified appraisal, no matter the cost.
According to The National Association of Realtors’ (NAR) most recent home sale data, 50 percent of homes sold in October would not have required an appraisal under the old regulations. NAR also found, however, that 35 percent of homes were sold in the range of $250,000 and $500,000. The median home value for all existing homes also climbed above $250,000 for the first time, meaning the median existing home would not require an appraisal if the regulations were implemented.
NAR, in a statement, said it agrees with the effort to limit the time and cost associated with completing residential real estate transactions while increasing market efficiency.
“However, with any such proposed change, America’s 1.3 million Realtors believe we must prioritize consumer protection and the continued assurance of market safety and soundness,” the statement reads. “We will continue to work towards that goal during this and all future conversations with these agencies going forward.”
Bill Merrell, the national education director for the National Association of Real Estate Appraisers and founder of the Merrell Institute, a real estate appraisal licensing school on Long Island, believes the move will hurt both appraisers and the consumer.
“I think it’s going to hurt the industry because it’s going to allow somebody with no knowledge of what a house is worth to just arbitrarily use comparable data without checking what’s inside or outside of it,” Merrell said. “You could have two houses – both houses identical in size and shape – and one house could be worth $100,000 more or less than the other house predicated on the interior finishings.”
Merrell believes consumers will take a hit if they are given an irresponsible appraisal. Right now, if you buy a home for $400,000 after an appraisal and that appraisal is wrong, you have a right to sue an appraiser, he said. But if there’s no appraiser, then nobody is responsible for the wrong appraisal.
“You can’t sue a bank, but you can sue an appraiser if the appraiser overvalues a home,” Merrell said.
The move will also “absolutely,” take work away from appraisers. Merrell is based in Long Island, where, according to Zillow, the median home value is $381,400 in Suffolk County. That value would not require a certified appraisal under the new proposal.
“60 percent of the homes on Long Island are between $250,000 and $400,000 dollars,” Merrell said. “So you’re talking about the fact that 60-70 percent of the homes that were appraised previously, if they don’t need to be appraised anymore, it’s going to take potentially 60-70 percent of the job market away from the appraiser.”
The move could also put further pressure and dependence on websites like Redfin and Zillow, which provide home value estimates.
Both home valuation tools have come under fire from the industry. Zillow was sued over its home valuation tool, with the plaintiffs alleging it lowered the value of for-sale-by-owner homes, but a judge dismissed that lawsuit earlier this year. Zillow recently made changes to its Zestimate algorithm and claims its 15 percent more accurate.
Redfin’s estimate tool came under fire in October when the founder of a low-fee brokerage penned a blog claiming it artificially inflates the value of homes.
Following the Nov. 21 proposal, the agencies behind the move are accepting public comments for 60 days.