Remember back in mid-2007, when the housing bubble was peaking, and the first inklings of trouble surfaced in the sub-prime mortgage industry? Few observers at the time imagined how far prices would fall. But as the dominoes tumbled, we soon learned that everything was tied to real estate values that had been propped up by loans that couldn’t be paid.
That’s just human nature. Having lived through a catastrophe, we take great pains to avoid seeing it repeated. In the stock market, for example, there was the Crash of 1929, and it wasn’t until 2000, 71 years later (one lifetime), that we had a similar crash.
Which brings me to the reason for this column.
As part of the Dodd-Frank law enacted in 2010 in the wake of the real estate crash, bank regulators were required to establish minimum standards for the regulation of the home appraisal companies.
They haven’t done it yet—it’s only been four years—but they’re working on it.
The dream (my word for it) of these bureaucrats is that home appraisers in the future will somehow magically not appraise properties at higher values when people are willing to pay higher prices, and conversely, that they will somehow not appraise properties at lower values even when people no longer want to pay higher prices.
In other words, they want the appraisers to ignore the market.
The current proposal mandates that appraisal management companies use only state-licensed appraisers with “the requisite education, expertise and experience necessary” to complete appraisals competently.
Leaving aside the question of whether expertise is different from experience—or was just stuck in because they couldn’t think of a third word (independence might be nice)—I have no doubt this effort will generate plenty of paperwork but will do little to change the real problem.
Because the real problem is too complex! In fact, all of the following were to blame!
The post-World War II housing boom sparked the start of the uptrend as supply struggled to meet demand.
The baby boomer generation continued it.
Bank deregulation in the 80s rewarded financial institutions for getting into more aggressive, more profitable, lines of business.
The Tax Reform Act of 1986 eliminated the tax deduction on interest on credit cards, leaving home mortgages as the main deductible interest.
The Taxpayer Relief Act of 1997 increased the capital gains exclusion for home sales, encouraging not only the construction of larger homes but also the financing of second homes and investment properties.
The government itself explicitly encouraged home ownership, in particular by requiring Fannie Mae and Freddie Mac to provide an increasing amount of their financing to low-income borrowers and by using the Community Reinvestment Act to steer money to low-income neighborhoods.
Historically low interest rates meant people were desperate for higher-yielding alternatives, and particularly in the wake of the 2000-2002 stock market crash, real estate looked like the only game in town.
Last but not least, there was the mental state of the entire country, which had become increasingly convinced over more than 50 years that “real estate never goes down.”
The ultimate result of the long uptrend was the evolution of flipping—the practice of buying a home to sell it quickly for a profit—and eventually the feature of flipping as TV entertainment!
I feel sympathy for young couples that bought a starter home in that climate; it’s not their fault that they matured at exactly the wrong time. But I have no sympathy for the “players” who were trying to make a quick buck in that environment. It’s the same at the end of every long-term bull market.
And making new regulations for home appraisers won’t change human nature.