1 minute readBeginning in January 2020, nationally, 7% of purchase transactions had a contract price above the appraisal, but by May 2021, the frequency had increased to 19% of purchase transactions. As expected, the frequency of a contract price being below the appraised value decreased from 69% in January 2020 to 52% one year later. The frequency of the appraised value matching the contract sales price remained relatively flat, moving from 24% to 29%.
Homebuyers can be negatively impacted when the contract sales price is above the appraised value as lenders use the lower of two values to calculate the loan-to-value (LTV) ratio. This scenario can require borrowers to bring more cash to closing to “close the gap,” or they may need to pay for mortgage insurance as their LTV is higher than planned. In the worst-case scenario, the sale falls through as the anticipated financing doesn’t work out.
During the same period, the CoreLogic Home Price Index (HPI) began a steady climb, moving from 4% annual growth in January 2020 to 15% through May 2021.
At highest risk in this squeeze are homes builders have designed, planned, and value engineered to fall within price ranges where buyers can qualify for Federal Housing Administration, Fannie Mae, and Freddie Mac-backed mortgages, which cap loan amounts and set loan-to-value limitations.
It’s a Whac-a-mole challenge where one slam of the mallot won’t likely make the problem go away.
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