Summary
Builders are facing issues due to the new changes in the HVCC appraisal code. While for the time being they are adjusting their prices to keep their sales, the impact of these changes for the new home construction industry is yet to be seen.
Analysis
In July, two studies showed that a significant percentage of builders reported serious sales challenges. This was due to appraisals coming in below the contract price as a result of new changes to the HVCC appraisal code. While losing a sale this way is still the exception rather than the norm, builders are making concessions to keep the sale, which continues to put downward pressure on pricing in the near term, but has resulted in virtually no change in cancellation rates.
Our builder contacts confirm that, in most cases, they are adjusting price to keep the sale. Most are managing a small backlog which enables sales people to keep a close eye on appraisals and to adjust price delicately and upfront as they see fit.
Ongoing efforts by both the NAR and NAHB to change the code resulted in the following clarifications by Fannie Mae and Freddie Mac in late July:
1. Lenders should use appraisers who “have clear experience in the geographic area.”
2. “Appraisers are not prohibited from communication with real estate agents.”
The phrasing of the latter clarification does not appear to limit the appraiser’s communication to just realtors, and we are waiting to hear what this means for the new home construction industry. Although the acceptable nuances in the language will take some time to work through, we expect that in 2 to 3 months from now, new home communities will better know what to expect from appraisals in order to be able to make adjustments on the front end of the sale.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
