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Home >> Daily Dose >> Is the Appraisal Industry Suffering from Barriers of Entry?
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Is the Appraisal Industry Suffering from Barriers of Entry?

appraisalThere a seismic change happening in the appraisal industry. Appraisers are diminishing in the housing market and the trend is showing no sign of reversal anytime soonunless something changes.

Scott Pickell, VP and Chief Appraiser at LRES explains to MReport what is happening to appraisers in the mortgage industry, challenges they face, and how the problem can be solved.

MReport: The appraisal industry has seen some dwindling numbers according to recent reports for a number of reasons. Why do you think this industry is struggling to bring in new hires? What challenges do appraisers face in today's market?

Pickell: This has been an ongoing issue for a couple of years; it’s something that the industry is aware of. The appraisal industry has created significant barriers to entry for new appraisers coming into the industry. It’s a double-edged sword. The industry wanted to become more professionally related. For example, one of the requirements to become an appraiser is a degree, whereas before, appraisers did not need a degree to be licensed and certified as an appraiser. Instead, they needed experience, take a few classes, and take the test to become an appraiser. This is one barrier to entry. Individuals graduating college are looking at potential jobs they can do.  They have to take many units in appraisals, have their degree, and then they must find someone who will train them. This is another barrier to entry. Typically, if these new graduates do not have someone in their family that will train them, they need to find someone who will for almost two years. You can imagine how difficult that can be.

In this industry volumes are very fiscal so if you are lucky to find an individual to train you, when they are busy, they may not want to take the time to do it. When they are really slow, they may not have enough business to actually train you.

Appraising is considered a “family business.” It’s very difficult for someone without those family ties to find someone who will train them. The training period is about 2500 hours. This is after they have gotten their degree and taken the state test. That’s a pretty significant time frame for anybody in any industry. The industry is aging. The average age of appraisers is approaching 60 years, according to one of our studies. This means that there are a lot of appraisers that are well-above 60-years-old.

These are the issues that the appraisal industry is facing. Frankly, it needs to be seriously considered on what can be done to attract new appraisers to the industry.

MReport: How can the industry bolster up their appraiser numbers?

Pickell: I don’t have a crystal ball, but as more and more appraisers retire and get out of the industry, there will be a shortage of appraisers. We are already seeing that right now in the last couple years. We were getting to a point where appraisers were quoting four to six weeks of turnaround time to get one report done for us in certain markets. What will happen is that as the number of appraisers reduces, the ones that remain in business will begin to charge more money, so all of sudden appraising will become a very lucrative profession in the future. That will probably attract new individuals. So money will be a big factor in attracting new appraisers into the industry.

Some clients say that we will not accept an appraisal from a trainee signing the report. Because of that rule, we typically don’t recruit trainee appraisers. Even though the supervisor may sign the report stating that they did inspect the property with the trainee, many lenders will still not accept those reports. Somehow, there needs to be some legislation that requires lenders to accept reports done by trainee appraisers. That’s part of the double-edged sword. If the industry does attract more appraisers, they can’t do appraisals because no one will accept their work. I am not an advocate of more legislation, but because we do have these levels in the industry, there needs to be some rules and regs surrounding trainee’s appraisals with supervisory guidance and approval.

MReport:  Let's talk about the homeowner vs appraiser opinion gap that Quicken Loans reports on every month. This gap, while it has gotten smaller over 2015, still persists. Homeowners are valuing their homes more than appraisers. Why is this? Will there ever be a point where the gap closes completely? Should the paradigm ever change to where appraisers' opinions are higher?

Pickell: We think we have had the internet forever but we really haven’t. In the last 10 or 15 years, the internet has probably had the largest impact on a lot of people. With that, companies like Zillow and some others that provide valuations on homes. This is not an appraisal; this is number crunching and regression analysis. There is a big difference between appraised value and that value or price that these websites and companies are giving these homeowners. It creates a false sense of confidence from the homeowner who says, “Zillow says my house is worth $850,000.” Meanwhile, the appraiser says, “No, based on the comps and adjustments I made, your home is worth $825,000.” You have to use the information wisely. Valuation has always been and will probably always be a subjective value because it’s not a science. It’s an art. You have a difference of definitions going on. Appraisers have a specific, defined market value (Fannie Mae Form 1004). These websites are not concerned about that, while for an appraiser, that is what they are analyzing, so therefore, they will exclude comparables in an area where these other websites will include them in their analysis. This can skew the numbers.

MReport: With slow growth expected in the housing market in 2016, how can the appraisal industry prepare, prosper, and increase business?

Pickell: Companies and individuals that have been in this industry for a long time expect this slow growth period. If you are doing origination loans, you are a victim to the interest rates. When interest rates are low, you are very busy, but when interest rates are tweaking up, business can be slow. Appraisers that understand that model, they are diversifying themselves and preparing for this slow period when it’s really busy.  They are preparing by always providing excellent customer service. When it’s busy and appraisers are doing everything they can to keep their heads above water, they still have to provide exceptional customer service to clients. Knowing that the industry will slow down soon, these clients will know who to turn to. This comes by turning around files quickly, providing the highest quality appraisal, and accuracy is always important. The companies that are just now realizing that 2016 will slow, will struggle this year and beyond.

Since 2008, with the advent of HVCC, Dodd-Frank, and other regulations, that’s when the AMC really started to explode. It’s been on an explosion pace since then; there has not been much of a slowdown. If 2016 brings a slowdown, there may be some consolidation in the AMC market, where there will be mergers and acquisitions taking place.

MReport:  What is your outlook for the appraisal sector in 2016 and beyond?

Pickell: This industry is very interest rate sensitive. The appraisal industry is very niche oriented and there are a lot of opportunities for appraisers and AMCs. Diversity is key. It’s all about diversifying your client base, not just focusing on originations. There is still a lot of business among defaults, short sales, and REOs. Finding that business and niches will help companies do very well. I have been in this business for 30 years now and nothing surprises me. When you’re in the middle of a slowdown and all of sudden the work stops coming in, appraisers will start to leave the business and pursue other opportunities. With the aging appraisal industry and the slowdown, it will accelerate people leaving the industry.

From an AMC perspective, compliance is such an important part of this industry. That is something that will probably cause other AMCs to close their doors or consolidate and merge with other companies. The cost of compliance is a barrier of entry for AMCs entering the industry.

About Author: Staff Writer

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