Trust This. Appraisals Down; Rents Up

☀️ Happy April! No foolin’: I’m writing this post while vacationing in the US Virgin Islands, wishing everyone could experience the beauty of these islands at least once in their lifetime. 🏝️

The appraisals are too *!#$% LOW

In the past month, we have seen more contracts cancel because of low appraisals than ever before.

Many brokers advise buyers to offer more than the asking price and waive appraisal contingencies. Buyers’ FOMO drives escalation clauses. Listing agents write escalation clause riders and appraisal waivers while warning sellers to be prepared for multiple offers that exceed the advertised price for the property.

A recent contract revision requires that appraisals be completed within the “loan approval period” which is typically the first 15 to 30 days after the contract is signed.

Why it matters: Appraisals are being completed earlier in the closing process, so buyers realize they are overpaying for a property sooner. Waiving the contingency for appraising at or above the purchase price, they lose their deposit or make up the difference at closing.

By the numbers:

Buyers appeal, argue over features and square footage, and order another appraisal.

Sellers re-negotiate prices or keep deposits and re-list the property only to find that the next buyer has the same appraisal issue, or a cash buyer is offering less.

Do appraisal waivers create another housing bubble?

Yes, but: Buyers and sellers beware of offering too much, or pinning hopes to a high price.

The bottom line: Signs are appearing that this bursting bubble could happen sooner than later, but supply likely won’t catch up to demand until 2024.

The rents are too *!#$% HIGH

The big picture: The Fed announced recently that homeownership affordability is at its lowest point since January, 2014.

What they're saying: Institutional investors from Wall Street and private hedge funds, are buying homes and building apartments as hedges against inflation.

And the fastest rising rental market is in single-family homes as tenants seek more space and privacy after suffering through pandemic lockdowns in multi-family apartment buildings with fellow tenants they had to avoid daily.

The bottom line: This has culminated in rents rising at a rate faster than expected prior to the pandemic. It’s a good trend for landlords but unsustainable for most tenants. It also prevents tenants from saving money for a down payment to purchase a new home. To cope, they may move to lower-priced areas, which is easier to do with remote work capabilities. Until we can work our way out of this housing shortage, rents will continue the uphill march.

That’s all for today from the islands, signing off with a little Bob Marley and the Wailers, wishing you were here too.