Orlando-area home values face 2 big hurdles before they can rise again

Article Courtesy of The Orlando Sentinel

By Mary Shanklin

Published December 31, 2010

Local home values have at least two big obstacles to overcome if they are to resume their historical rate of appreciation anytime soon: tougher appraisal standards and a price-leveling pool of foreclosure properties.

Stanley Smith, a University of Florida finance professor who studies the appreciation of single-family homes in Central Florida, found recently that their value has grown during the past three decades at an annual average rate of 3.2 percent.

Of course, if you examine just the past five years, home values have dropped by more than a quarter, underperforming even the stock market.

So getting back to that long-term, average growth rate may take some time.

Fiserv Inc., which works with Moody Corp.'s Economy.com unit to forecast home prices, predicts values in the Orlando area will decline an additional 6 percent in 2011.

Most experts point to stubbornly high unemployment and foreclosure rates as prime reasons the region's price erosion is likely to continue. But some also cite the way houses are now appraised as contributing to the ongoing slide.

"It's going to make it very, very hard for appreciation to enter back in the mix," said Tim Mattingly, founding partner of Orlando-based United Mortgage Partners LLC. "We face it every day when someone is trying to buy a property for a good price, but the neighboring properties don't support the value, and the appraisers have zero flexibility."

Before the housing slump and recession, appraisers faced far less scrutiny and had more flexibility in determining a home's value by factoring in the distance and the timing of similar sales and making adjustments. But "much of that flexibility is gone," Mattingly said, as the result of state and federal reforms passed in recent years.

So now appraisers have to stick to closer to home when judging a property, even if that means using nearby foreclosures or distress sales as comparables in their reports.

Take, for instance, two houses in the same neighborhood that are identical in every way except the one for sale has been well-maintained, while the recently sold comparable had been abandoned, needs a lot of work and lacks any landscaping. The manicured house should be worth $100,000 more than the beat-up one, but its appraisal will estimate its value to be within $30,000 of the other one because of the new standards being applied.

Inflated appraisals were blamed for contributing to the run-up in prices during the peak years of the housing boom five and six years ago. Getting their assignments from mortgage brokers who profited from ever-higher-priced sales, appraisers could easily stretch values in a market where median prices climbed as much as 40 percent a year.

After the market crashed in 2007, state and federal regulators enacted a series of reforms to distance appraisers from lenders. New rules that take effect in April as part of the federal Dodd-Frank financial-overhaul law will prohibit "coercion and other similar actions" that would cause appraisers to value properties for reasons "other than their independent judgment."

And because the housing slump also roiled the world's financial markets, mortgage underwriters now want conservative appraisals more than ever.

"Wholesale lenders, the people buying the loans, are afraid they won't be able to sell them, and the underwriters have a lot of pressure to scrutinize the appraisal," Mattingly said. "The underwriters may challenge comparable sales listed on the appraisal and maybe even reject the appraisal."

Orlando-area homeowners with the hardest climb back to annual appreciation of their property's value are those in neighborhoods rocked by distress sales often outlying subdivisions built from 2004 to 2007. Values there have completely collapsed from their peak sales periods, and a disproportionate share of those sales were financed with troublesome, subprime home loans.

Homeowners who have sunk money into kitchen renovations or other improvements will find it harder to realize the gain in their appraisal when the property is compared with neglected or abandoned distress sales that are used because they happen to be nearby, said Tim Burns, owner of Burns Appraisal Inc. in Winter Park.

"Short sales and foreclosures have no business being compared with arm's-length transactions, but they are being compared," Burns said.

Major mortgage lenders, he said, now want to consider more than three comparable sales long the standard measure when pondering a loan application. They want to know the kind of competition a house faces by essentially seeing a list of what's for sale in the neighborhood.

As for a return to the days of steady appreciation, Orlando economic analyst Owen Beitsch notes that the nation's leading home-price index is forecasting a 15-year recovery for the nation's hardest-hit markets.

"It's going to be a long time before we start seeing significant price appreciation in Central Florida homes," Beitsch said.

In analyzing the region's past 30 years of home appreciation, UCF's Smith noted a spur in the Federal Housing Finance Agency's housing-price index during the third quarter of this year, when single-family prices in Orlando's four-county metropolitan area actually rose 1.2 percent.

Prices in neighboring Volusia and Brevard counties declined about 2 percent during the quarter, but even that negative result was an improvement compared with the steeper drops of previous quarters.

Smith was reluctant to read too much into that single change, however.

"As was noted with the positive returns in the first quarter of 2009," he said, "it could be the first step in the recovery of prices or just another variation that may go down again in the next quarter."