Who Controls Property Values?

This is a question as old as the real estate business itself. Who controls property values? We all know that sellers do not control property values. Sure they can set the asking price, and control the condition of the property, but not the value of a given piece of property. Yes, they can improve the property and theoretically increase the value that way. But conventional thinking has always been that the buyers control the property values. You know the tried and true saying that a property is worth what a buyer is willing to pay for it. And this has certainly been the case for as long as I can remember.

But things have changed. Do buyers still have input as to the value of properties? Yes, of course they do. Without buyers, there is no sale, and therefore no indication of the value as dictated by the law of supply and demand. But there is a new sheriff in town in this debate. One can make a very strong argument that it is now the Banks that control property values (well okay, banks and mortgage companies). Banks control property values in two ways:

First of all, thanks to recent changes in the appraisal process, properties are now worth what a buyer is willing to pay for it and what a bank is willing to appraise it for. And we are seeing more and more often that banks are appraising properties for less than what the buyer has offered. Is this a conscious decision? Partly. Banks have become much more conservative in property valuations, and want to avoid the aggressive appraisals that helped fuel the dramatic rise in property values earlier this decade. Banks have introduced more stringent guidelines and procedures designed to keep appraisals more conservative, eliminate undo influence between the lender and the appraiser, and protect the lender’s interest. We are seeing an increasing number of sales fall apart because the bank appraisal came in lower than the sales price. So, if a house sells for $800,000, but the bank only appraises it for $750,000, what is the house worth? In most cases it is now worth $750,000, unless you can find a bank that will appraise it for higher or unless the buyer is willing to pay over the appraised value (not something most buyers are willing to do). So can the seller get an appraisal before putting the home on the market? Yes, but the buyer’s bank will get another appraisal, and it may or may not appraise at the same value. So in essence, the value is largely dictated by the opinion of the appraiser, who might be from 100 miles away and largely ignorant of the nuances of the local market. Great.

The second way banks control property values is through foreclosures. As previously discussed, there is currently a glut of foreclosed homes that banks have not put on the market. They clearly control when these homes hit the market, and therefore have some control over the direction of property values, at least in the short term. There is much debate about why banks have not put these homes on the market, but one thing is certain… if banks release a flood of foreclosed homes onto the market, we will likely see downward pressure on the banks. If they release them slowly or delay releasing them, they can keep property values stable. It’s largely up to them.

So next time you get annoyed at the long lines at your bank, or their short (and getting shorter) business hours, you might want to remember who controls property values for the moment… and be extra nice.