Watch out for appiaisals Housing recovery not without hurdles

By Gary Zauner Crow's Weekly Market Report

QOME of the best news for the L)wood products industry in many months just arrived with the announcement of new one-family house sales in June. The seasonally adjusted annual rate jumped to 384,000 from 346,000 in May, an increase of ll%o.

Just as important was the decline in inventories of newly constructed homes as a result of those sales. Those have now dropped for 27 consecutive months, from 548,000 in March 2OO7 to 281,000 in June. The months' supply of new houses at the current sales pace dropped from 10.2 months in May of this year to 8.8 months, the lowest month's supply since October 2001

This news came on the heels of two consecutive months of increased housing starts, the latest at 582,000 and the highest pace since the end of last year. In their latest forecast, RISI expects housing starts to remain in the range of 500,000 to 600O00 during the third quarter and to exceed the one million mark in the second quarter of next year.

In addition, existing home sales increased 3.6Vo in June, ending only O.ZVo below the sales pace established in June 2008.

Affordability is still historically high. The National Association of Realtors' (NAR) Housing Affordability Index has retained a level of over 170 throughout the year (May is the latest Index available). Back in May 2008, the index was a mere 129.8.

In 2006, the percent of income used for mortgages was 23.37o.ln May, that percentage was down to l4.6Vo. Unfortunately, the key to this newfound affordability is falling home prices, impacted severely by the high number of foreclosures. The new tax incentives for "first-time" homebuyers are also adding to the affordability, although those will disappear before the end of the year.

The NARs' Pending Home Sales Index in May (latest figures to date) showed the fourth consecutive month of increases, from a low of 80.4 in January to 90.7 in May. What has rendered the increase in pending home sales less sienificant is the number of home appraisals coming in below the agreed sales price between buyers and sellers.

Despite the more positive news sunounding housing markets, builders are having their doubts about the future of homebuilding. In the National Association of Home Builders/Wells Fargo Housing Market Index for July, builder confidence did inch 2 points higher to 17, but it is still an extremely low number. An index reading of over 50 indicates that more builders view sales conditions as good rather than poor.

"Builders are seeing slightly better sales conditions this month as consumers take advantage of the firsttime buyer tax credit, low interest rates and attractive home prices," said NAHB chairman Joe Robson, "but many remain quite concerned about the road that lies ahead."

One of those concerns is the increase in low home appraisals, which the NAHB says is causing onequarter of all new home sales to fall through.

On Mav l. the Home Valuation

Code of Conduct went into effect, barring mortgage brokers, real estate agents, and loan officers from selecting appraisers for any loan that could be guaranteed by Freddie Mac or Fannie Mae. Relationships between appraisers, real estate agents, and mortgage brokers in the past were considered both too chummy and open to unethical practices. Since the new rules were established, thirdparty appraisers, often hired through appraisal management companies. are establishing the sales value of more homes.

The elimination of these previous relationships between entities seeking commissions from home sales has apparently caused more stringent, and what some argue as faulty, approaches to the appraisal process. As a result, low appraisals are much more common now than when home prices escalated by the week during the housing boom.

Proponents of the new rules argue that artificially high appraisals during the housing boom were instrumental in the record amounts of foreclosures in today's housing market. Ironically, those same foreclosures are now used in some instances as "comps," the sales prices of other comparable homes in an area used to calibrate the appraised price of a home for sale. Foreclosed homes are usually sold for less than what non-foreclosed homes sell for, therefore they lower the average price of the "comps" and, thus, the appraised value of a home.

The most vocal opponents of the new rules are those with direct interests in the sales of homes. One of those is Lawrence Yun, NARs' chief economist, who recently said, "It's pointing to thousands of delayed or canceled transactions. We've had a massive inundation from members saying this is a big problem."

While housing statistics today are considerably more positive, hurdles and pitfalls persist in the recovery. The high rate of foreclosed homes continues, as does the escalating rate of unemployment. Money flowing from banks remains constricted and the U.S. is riddled with debt. But for now, at least the signs of a housing recovery are appearing.

- Gary Zauner is editor of RISI's Crow's Weekly Market Report, which offers free trial subscriptions at www.risiinfo.coml crows. Reach Mr. Zauner at gzauner@ risiinfo.com.