Lower Home Appraisals Will Help Some, Hurt Others

Those who get hurt by lower appraisals are the sellers, who become underwater or even more than 25% underwater, which appears to be the threshold for mortgage mitigation programs. The lower the appraised value, the less likely a servicer will be willing to offer a Short Sale and the more likely that the homeowner will default and then foreclose. This could propagate into even lower home prices, exacerbating the problems in the housing market.

This will also hurt the homebuilders because new homes may become unprofitable to build and sell given the higher costs of building materials. In a market where new homes are being sold, the same model can be appraised at a lower price due to defaults up the block from the builder’s site.

This will likely lead to 3.5 to 4.0 million foreclosures this year, up from 2.8 million in 2009. Also keep in mind that the Case Shiller Housing Market Index is 50% higher than in 2000, so home prices have room for another leg down.

We will continue to monitor things and report here from time to time on the state of the housing markets.