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April 29, 2007 Where were the appraisers?
House-flipping in Vegas! Seemed like a great idea at the time. As I have read several of the articles on the problems in Clark County I am amazed at the stories. "We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of the investment equity" said an investment buyer (Denver Post - April 29, 2007). Once again we all sit back and ask ourselves how in the world could anyone think that after home prices had soared $200,000 in 18 months, that now was a great buying opportunity. We wonder, what they were thinking, when they still would buy the home knowing that the sales staff increased the price $20,000 after every fifth buyer or when they slept over night in the parking lot with 100 other people just to simply have an opportunity to make an incredibly speculative investment. And most importantly how making a down payment of $5,000 on a $540,000 investment home was a 'great opportunity'.
Of course, hindsight in these situations is brutally honest and you never know what markets will do. Yet, where were the real estate appraisers in this blistering market frenzy. It seems to me that real estate appraisers are hired to provide a sense of legitimacy to the loan transaction. They are asked to approve the price as reflective of value and insulate the lender and the borrower in some sense from a transaction that simply doesn't work. A 1-in-30 foreclosure rate today? I recognize that the excuse is simply, "well that's what the market data was telling us," but I wonder what value a real estate appraisal truly provides. It seems to me that if the market is moving up, everyone will get approved because the market is moving up. A real estate appraiser uses market comps as evidence of the market, thus we find a self-fulfilling prophecy. This was obviously the case in Vegas. They were selling $350,000 homes for $540,000, the lender was heavily exposed, the buyer lost their downpayment, and the seller was booking rooms at the Belagio. Yes, history continues to repeat itself, S&L crisis anyone?
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