SOURCE: FNC, Inc.

FNC, Inc.

January 18, 2011 12:35 ET

FNC Study: Home Prices in Hard Markets Misrepresent Property Values

Appraisals in Down Markets Trend Higher Than Privately Negotiated Sales Prices

OXFORD, MS--(Marketwire - January 18, 2011) - A study released by mortgage technology company FNC, Inc. indicates the importance of an accurate appraisal in representing the true value of residential property -- something often misrepresented in a privately-negotiated sales price.

"When fundamental market inefficiencies -- high transaction costs, low information transparency and low liquidity, combined with substantial asset heterogeneity -- commonly underlie real estate transactions, it's easy to understand why privately-negotiated prices can often misrepresent a property's true value," said Yanling Mayer, FNC senior research economist and the study's author.

Appraisers' expertise and local market knowledge enable them to provide more accurate estimates of the asset's underlying value. These appraisals become especially important when market conditions are difficult to monitor due to quickly falling or rising markets or abnormal conditions such as frequent loan delinquencies and foreclosures.

Using a random sample of residential appraisals ordered by various U.S. mortgage lenders from January to December, the study indicates that more than 60 percent of these appraisals exceeded pre-closing contract prices. On average, appraisal value was 1.7 percent higher than the contract price. 

In addition, the study finds that properties priced lower than $300,000 consistently receive higher relative valuations than higher-priced properties. In October, for example, 23.8 percent of lower-priced homes had appraisal values exceed the contract price by more than 5 percent, while only 10.9 percent of higher-priced homes received a greater-than-5-percent upward adjustment to the contract price. The average appraisal-to-sales ratios are 3 percent for lower-priced homes, but a mere 1 percent for higher-priced homes. 

"The study indicates that the difference is likely caused by liquidity-driven homeowners who are forced to offer more attractive, below-market prices in exchange for relatively quick sales in the highly distressed lower-end housing market," Mayer said. "Another reason is the possibility of a marketwide over-correction in this housing sector."

For more detailed results of the study, please visit http://www.fncresidentialpriceindex.com/. FNC provides free online access to its research reports.

About FNC, Inc.

Since 1999, FNC has pioneered real estate information technology, automated appraisal ordering, tracking, documentation and review for lender and servicer compliance with government regulations. FNC's platforms are in production at seven of the 10 largest U.S. mortgage lenders and provide value to large and small lenders with reduced costs and more efficient loan processing. With collateral management platforms, data and analytics, FNC provides advanced insight into the property backing a loan from origination to capital markets. Visit FNC online at www.fncinc.com.

Contact Information

  • To arrange an interview with any of FNC's mortgage industry experts, contact:

    Bill Dabney
    FNC PR Manager
    Phone 662/236.8304
    Email Contact