Buy or Wait "Appraisal Gap" | IKON Mortgage Inc

The term “Appraisal gap” is nothing new to the mortgage industry, but it has surfaced as a leading subject in the real estate market here in 2021. I am sure you’ve either heard or had first-hand experience of the current market conditions. Low inventory, plus low interest rates, has been a catalyst to this scenario. Are interest rates going to increase? Is the market going to take a dip? Is the housing market going to continue this upward trend? Most inquiring minds are wondering what the impacts of this market will have in the future. I could personally raffle off a dozen questions of my own, but I think I would like to hear what the experts are saying.

The appraisal gap is the difference in appraised value and purchase price. As you may know, traditional lenders will not finance loans to accommodate the appraisal gap… that must come from the buyers own funds and paid at closing in addition to down payments and any financing fees. I cannot recall a time in my personal life where such a massive amount of home buyers is all essentially in a bidding war, just to get into “any” home available. Personally, I have heard from realtors who lost deals to all cash offers as much as, $150K over asking price, but most are in the $30k over range. There was a story from Channel 8 News, ABC affiliate in DFW, by Jason Wheeler on May 19^th where a buyer offered $300k above ask on a million-dollar home and won, but it was still close. Additionally, I have been reading that many buyers are using funds from previous home sales, personal savings, borrowing from relatives, or even taking out loans against their 401K retirement accounts to satisfy the appraisal gap.

Way back in 2017, Forbes released an article discussing whether home buyers should pay more than appraised values on their dream home. From my interpretation of the article they said, “try not to pay more than the appraised value” while also using the analogy that you would not pay more than retail for a pair of shoes. Why would you pay more than the appraised value for a house? Fast forward into 2021 and everyone seems to be fine with paying more than appraised values for their homes? KXAN an NBC affiliate out of Austin, TX reported an interesting statistic referencing mortgage data from Redfin mortgage showing 1,500 homes were purchased over appraised values between January 1, 2021, up-to June 4^th 2021. In 2020, a total of 22 homes were purchased over appraised value for the entire year in the City of Austin. That’s a huge spike which is amazing because home values have been climbing in previous years.

Recently, we have been hearing speculation of inflation swirling and we’re all on the edge of our seats while waiting for the Federal Reserve to provide an update. Treasury traders do not like inflation because that means the coupon payment and principle are not worth as much in the future. You may have also heard of concerns about loans in forbearance but last I checked that number was below the 5% threshold of concern. Although the eviction/foreclosure protections are still in place set to expire June 30, 2021, yikes! That is just a few weeks away but with home values are the rise and inventory shorthanded will banks be licking their chops? Chase and Bank of America intent to proceed with forecloses in July while Wells Fargo has announced they will wait until 2022. Certainly, the market is twisting and turning in all directions and there is a lot to consider, if you are contemplating a home purchase in this market.

Each home buyer situation is very different… some may be moving from out of state, upsizing or expanding their square footage with the work from home environment, or first-time home buyers. There is likely many other scenarios and everyone will need to decide for themselves if they are willing to pay more than the homes appraised value. Occasionally, appraised values may be slightly behind the market conditions and in this scenario with such a hot market that could be the case. Either way, I could see myself making the decision not to buy or buy over the appraised value depending on dynamic of the scenario. If you find yourself in this type of situation, I advise you to make the sole decision for yourself and family because you’re the only person who knows what’s best!

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Buy or Wait “Appraisal Gap”