Lenders balk on home loans as prices for new houses outpace appraisals in OKC

·4 min read
A new home by Ideal Homes & Neighborhoods at 808 Firefork Ave. in Yukon.
A new home by Ideal Homes & Neighborhoods at 808 Firefork Ave. in Yukon.

Prices for new homes are outpacing appraisals, busting purchase contracts if buyers and builders can't come to terms and fill the financing gap.

Metro-area Realtors in a recent Facebook discussion mentioned appraised values for new homes falling short of what lenders required to make mortgage loans by $14,000, $20,000, and $22,000. None responded to a request to comment publicly.

How did we get here?

Rising costs to builders for scarce labor and hard-to-get materials are showing up as rising prices for home buyers. It's too much for some deals to seal.

"The skyrocketing prices of materials made 2021 particularly challenging for appraisers to find adequate comparables. Because of this, appraisals are just now starting to catch up with building prices," said Erin Yarbrough with Ideal Homes & Neighborhoods.

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Comparables, or "comps," are recent sale prices for similar homes in a given area used by appraisers, among other things, to determine a fair market value for a home for sale.

Construction costs rose so fast, especially for lumber, that the cost of building the same exact house in the same neighborhood could vary by thousands of dollars from one week to the next.

None of several appraisers asked for comment returned messages.

Norman-based Ideal Homes, Yarbrough said, "has been very transparent with buyers up front that there is always a possibility appraisals could come in short, but we are working diligently with appraisers to ensure they have as much information as possible about the cost of building materials."

Extra information and communication with appraisers are keys to narrowing the gap between appraisal and asking price, said Caleb McCaleb of McCaleb Homes in Edmond.

"We try to supply all of the latest comparable custom sales that may not be showing on the MLS," he said, referring to sales by builders not using Realtors, so the information doesn't feed into data on the Multiple Listing Service.

"We also supply the appraisers with all of our costs to build the homes and offer all of the invoices to build the home if they’d like to see them. Appraisals are not keeping up with actual costs though," McCaleb said.

McCaleb Homes entered this home in the 2021 Parade of Homes Spring Festival.
McCaleb Homes entered this home in the 2021 Parade of Homes Spring Festival.

What's next for OKC's housing market?

When an "appraisal gap" happens, three things can happen, said Scott Senner, a loan originator with Interlinc Mortgage Services in Edmond.

"One, the buyer pays the difference in cash at closing. Two, the seller agrees to lower the price of the home to match the appraisal. Or three, the deal busts,“ he said.

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Builders can work with appraisers, but differences in add-ons and amenities between houses make the cost of construction difficult to gauge as a comparable, Senner said.

"The cost of construction," he said, "will not affect the value the appraiser affixes to the property. (Say) a builder has two identically sized homes next door to each other. In House A, he puts in standard appliances, fixtures, standard roof, etc. In House B, he upgrades appliances, fixtures, better roof, etc.

"The 'cost of construction' for House B will be higher, but the value is not going to change by much, if any, just because he spent more to build it."

Not by much, but some, because the cost of materials used to build a house can go into an appraisers' opinion of its value, according the National Association of Home Builders, which responded earlier this year when lumber prices were throwing appraisals off.

"It is important to understand that appraisers can incorporate three approaches to determine the value of a property: sales comparison, cost and income methods," the trade group said.

Homes by Home Creations on Celeste Lane in the company's Palermo Place addition west of S Western Avenue between SW 134 and SW 149.
Homes by Home Creations on Celeste Lane in the company's Palermo Place addition west of S Western Avenue between SW 134 and SW 149.

Hurting rentals, resale homes too

Rent can be used to appraise duplexes, fourplexes and other types of homes that generate income.

"Under the cost approach, the appraiser estimates what it would cost to rebuild or construct an equivalent structure. Because this component of property valuation considers the costs of materials used to construct the property, it is often very helpful in analyzing the value of a newly constructed home," the national builders group said.

Appraisal gaps aren't necessarily uncommon for resale homes, but now they're a problem "across the board," said Aspen Endriss with Home Creations.

Read more: Zillow's iBuying failure draws Realtors' zings

"Materials and trades are going up, and companies are responding to this by going up in price as well," she said. "Appraisals have been used the past to dictate the current prices of homes, but through the pandemic this has taught us this isn’t able to be true right now.

"The pandemic has brought us to something we never thought we would see again, and how we have had to adapt is by pushing prices higher to keep sustaining. We can’t absorb all the increases of commodities and we alleviate some pressure by gradually passing it on to the consumer.

"This is true for many other businesses as well. If a home does not appraise, in our contract it has a section where the buyer is responsible for the differences."

Senior Business Writer Richard Mize has covered housing, construction, commercial real estate, and related topics for the newspaper and Oklahoman.com since 1999. Contact him at rmize@oklahoman.com.

This article originally appeared on Oklahoman: Realtors: Prices for new homes are outpacing appraisals in OKC

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