Homes appraised above contract price had above-market appreciation rates
For homebuyers, the outcome of appraisal is one of these three scenarios: (1) appraised value closely matches sales price, (2) appraisal falls short of sales price or (3) appraisal is higher than sales price. If a home sells for less than its appraised value, does that mean that the buyers got ‘a bargain,’ and should anticipate above-average appreciation during their ownership period? Conversely, if a home sells for more than its appraised value, does that mean the buyers may have ‘overpaid,’ and could expect a below-market rate of price growth during the length of time they own the home?
Evidence seems to support the hypothesis that there is “money left on the table” in high-appraisal transactions. When property price appreciation was calculated for twice turned-over homes in the California market – first sale observed with a full appraisal and sales closing price in 2010 or later, and then a second time with a sale by the owner – homes previously appraised with a sizable premium above the contract sales price were found to have above-market appreciation rates.
As shown in Figure 1, excess rates of price appreciation averaged about 3.3 percent per year. By comparison, closely appraised homes appreciated at about the market average, while homes with appraised value below their contract sales price appreciated 0.3 percent per year slower than the market. Excess appreciation rates were annualized price gains at re-sale—annualized percentage difference between prior purchase price and subsequent re-sale price, in excess of average market appreciation during the same ownership period. The CoreLogic county-level Home Price Index (HPI) was used as the benchmark of market-wide appreciation.
Figure 2 shows that high-appraisal homes – whether a distressed sale or not – had above-market price appreciation, averaging 3.15 percent among non-distressed sales or 3.9 percent among distressed sales. Real estate owned (REO) and short sales exhibited above-market appreciation rates across all three appraisal valuation outcomes, likely driven by their below-market pricing to motivate sales. Investors’ value-enhancing repair and refurbishing work could also be a factor for their higher re-sale values – despite that only homes that were held for at least 18 months since initial purchase/appraisal were included in the analysis. For both non-distressed and distressed sales, median prices of high- and low-appraisal homes were lower than closely appraised homes. Since both high- and low-appraisal homes may have drawn disproportionately from lower-priced homes, faster price appreciation experienced by low-valued homes alone could not explain away the large disparities in price appreciation between the two.
In Figure 3, sample homes were further sub-grouped by the year in which they were initially purchased and appraised. Given significant market dynamics during 2010-2015, property appreciation rates were likely to vary depending on the timing of initial purchase. They ranged between 2 and 5 percent, reaching the highest during the 2012 market bottom when market-wide underpricing was likely the severest.
A city-level breakdown is shown in Figure 4. Stockton (5.87 percent) and Riverside (5.22 percent) had the highest excess price gains, followed by San Francisco (4.62 percent), Los Angeles (4.35 percent), Bakersfield (4.24 percent), and San Jose (4.04 percent). Due to the use of county-wide HPIs for benchmarking, some cities – such as Oakland, Riverside and others – that may have experienced faster-rising prices than its county as a whole could well see across-the-board positive excess price appreciation.
Regardless of the reason(s) why a home may have sold for less than its appraised value, the buyers appear to have benefitted by having a faster-than-market appreciation during their ownership tenure.
 In general, low-price tier homes have appreciated faster. See Exhibit 1 inside the CoreLogic U.S. Economic Outlook (November 2015): http://www.corelogic.com/blog/authors/frank-nothaft/2015/11/corelogic-us-economic-outlook-november-2015.aspx.
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