The Tyranny of Mark-to-Market Rules for Houses

Just when you thought you'd heard everything, it turns out the real villain in the continuing death of the real estate market is…the appraiser who refuses to turn that frown upside down.

"Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates," says Lawrence Yun, chief economist for the National Association of Realtors. "First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan." [Italics and boldface mine.]

The near enemy in this case is said by Bloomberg to be New York Attorney General Andrew Cuomo. Cuomo's recent settlement with the government-sponsored-entities (GSEs) FANNIE MAE and FREDDIE MAC and the Office formerly known as Office of Federal Housing Enterprise Oversight (OFHEO), now Federal Housing Finance Agency (FHFA—find them online at http://www.ofheo.gov/!), may have tightened slightly the spigots that dispense federal guarantees for house loans.

The Cuomo Agreement, whose effects have been called without braggadocio the "biggest changes to the real estate appraisal industry since the implementation of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 [pdf] (FIRREA)," stands accused by the far enemies: The Federal Reserve, the the Mortgage Bankers Association, and the U.S. Office of Thrift Supervision.

I know the Cuomo's enemy-is-my-friend rule has served our tribe since the time of Abraham, but I agree with naked capitalism that Bloomberg picked the wrong enemy here. Disclosure: In 1998 I walked away from a starter home a block from the ocean in San Francisco in the surety that scientists had proven, as incontrovertibly as they had the sound barrier and the four-minute-mile, that nobody would ever pay more than $200,000 for a house, so there was no way the deal would ever pay for itself; more recently I caused the 2006 crash by becoming the last skeptic.

That having been said, anything that sends real estate appraisals down is a return to reality from deep, dangerous fantasy. Even with both hands I can't fully grasp the "two bottoms" principle of real estate decline. But what we have evidence for at this time is that real estate values may (or may not) have concluded their free-fall phase. We have no evidence that they have stopped or will stop declining.

Correct me if I'm wrong: Real estate goes through periods of slow and exquisitely painful decline more often than it goes through the kind of tremor we have experienced. (Whoever we am.) Why is there an assumption that nationwide house prices will not sink another 10% or 80%? We have barely unwound the G.W. Bush era in most housing markets, and I can tell you from memory: Americans woz not big savers neither when Bill Clinton was in office.

I understand Lawrence Yun's position on this matter. I understand the far enemies' position: they want to prove they can prop up housing markets around the country. But what of the neither-near-nor-far enemy, the Chicago-based Appraisal Institute (which gained substantial powers under the 1989 agreement, and which sells copies of its Uniform Standards of Professional Appraisal Practice at $50 per)? Why is it an appraiser's business whether Fannie money comes through after the honest appraisal? Why is it an appraiser's business that the deal gets done at all?

(I mean, factoring out who hired the appraiser—and all the appraisers I've ever dealt with have been fee-only—it's supposed to be an arm's-length transaction.)

(Also to all lovers of fannies and bottoms, I apologize for this post.)