Sinking appraisals drag down home building industry

Daily Reporter (Milwaukee), Dec 26, 2008 by Sean Ryan

Home builders will continue to lose projects if the appraised value of houses continues to dip below the cost of construction.

Lenders use appraisals to determine how much to give homebuyers for new home construction. But the declining housing market is dropping the appraised values of homes on the drawing board below the cost of building them, forcing owners to either give up or pay the difference out of pocket, said Joe Panico, state director with the South Central Wisconsin Builders Association and Wisconsin Builders Association.

"If this doesn't get corrected, there is a real problem, and there's going to be a lot of builders going out of business," said Panico, owner of Blackhawk Homecare LLC, Janesville. "It's like we're in a tailspin now."

When assigning a value to a house, appraisers put more weight on the conditions of the housing market than the cost of bricks and sticks, said Rebecca Wehrwein, a licensed appraiser with Rock Valley Appraisal Service, Janesville. So, as the market slows, home values drop regardless of construction costs, she said.

"Things that are impacting values in our area -- a big thing is the GM (General Motors) closing and the associated companies that have closed because of them," Wehrwein said. "Generally, I think everybody is afraid to spend money to purchase homes."

Panico said the announcement of layoffs at the GM plant spooked local appraisers, prompting him to wonder why the values assigned to homes are not based on a more long-term view of the market.

Wehrwein said appraisers adhere to the Uniform Standards of Professional Appraisal Practice, which are set by The Appraisal Foundation, a national nonprofit organization. Appraisers cannot deviate from the standards, which call for a review of the current market, to increase the appraised cost of a home, she said.

"We could lose our license for that," she said.

That might be reason enough to rewrite the standards, said Jason Steen, president of Steen Construction of Osseo Inc., which lost projects because of the appraisal problem.

He said his company primarily builds custom homes for buyers willing to accept the price of construction. But low appraisals stemming from the sagging housing market are dragging down custom projects. Potential buyers can't borrow enough money to cover the cost of construction, he said.

Steen said construction costs for low-end homes are, on average, 5 to 10 percent higher than the appraised value. For high-end homes, he said, the discrepancy increases to as much as 15 percent.

"I don't know what can be done about it, but I think it's something that will need to be looked at," Steen said. "Over the last six months, it's progressively, in my opinion, gotten worse."

Panico said he is trying to find a solution because the problem is cropping up statewide, but he has yet to find definite answers.

"If the value is not there, it's not there," he said. "But how do you come up with a value that is less than the cost of building a home?"