Appraising PropTech Innovation: Do Short-Term Changes Have Long-Term Effects? – CoreLogic®
A Conversation With Shawn Telford
Most of us don’t have enough money in the bank to buy a house in cash. Instead, we need to convince someone to provide a home loan.
However, banks need to ensure that they can protect their investment should the housing market see a downturn, so they are invested in knowing much a house is worth compared to the money they lend a buyer. This is known as a loan-to-value ratio, with an appraisal determining the property’s value.
Estimating how much a home is worth requires detailed, hands-on systems, but it is a process that is gaining significant efficiencies thanks to innovation within the industry. In this episode, host Maiclaire Bolton Smith speaks with CoreLogic Chief Appraiser Shawn Telford to talk about the advantages — and sometimes challenges — that automating a generations-old system presents.
Maiclaire Bolton Smith:
Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies and technology affect everyday life. I am your host Maiclaire Bolton Smith, and I’m just as curious as you are about everything that happens in our industry.
In today’s episode, we want to talk about appraisals.
For many, a property appraisal is a line item that defines both equity and annual taxes, but it’s so much more than that. Appraising is an entire subset of the property market. It involves lenders, borrowers, appraisers, secondary market investors and, of course, homeowners. It’s also an area of the industry where people still perform a large volume of the process manually. This makes the cost of an appraisal susceptible to volatility in the employee market, but it also puts the industry in a prime position to benefit from automation. The pandemic was a catalyst for modernization, but there remains plenty of room for growth in this area.
So, to kick off Season 3 and talk about where the appraisal industry is headed in 2023, we welcome back CoreLogic Chief Appraiser, Shawn Telford. Shawn, welcome back to Core Conversations.
Shawn Telford:
Thank you. Happy to be here.
MBS:
Alright. So it’s been a while since you’ve been here. You actually kicked off our season at the beginning of 2021. So excited to have you here to kick off 2023 again. So, before we jump into our discussion, can you just remind our listeners about your background and your role here at CoreLogic?
ST:
Sure. So, I began appraising in 1993. I was in college, and I discovered that I could make more money working in real estate than at a department store. And so I began that career, yeah. I also realized when I was in college that technology was going to be the wave of the future. And so, as I began appraising, I started focusing on the technological components. Now, granted, this is the early ’90s, so it was just beginning. And so as I worked through my career as a staff appraiser at Washington Mutual, then with a startup and then eventually with a company called FNC, which was acquired by CoreLogic in 2016.
And I have worked on the technology side of building tools and products for the appraisal industry and lenders at FNC, and then at CoreLogic. And then most recently, about two years ago, they asked me to be the chief appraiser here at CoreLogic, focusing on industry relations, outreach, compliance and such. And so I work with a lot of the different parts of CoreLogic, and I have the opportunity to work out in the industry and learn and help and talk about the great technology that CoreLogic builds, and also to help solve problems in the industry.
MBS:
That’s right because I remember when you were here for the first time, it was when you were the newly-appointed Chief Appraiser. So, we are glad to have you back to chat today. And I guess let’s just start by briefly — can you talk about how appraisals fit into the home buying process? And then let’s get into a little bit about how the unprecedented market conditions during 2022 — it was just a crazy year — how it created challenges for borrowers, lenders, real estate agents and the secondary markets.
ST:
Yeah absolutely. So, most of us don’t have enough money in the bank to buy a home with cash, and so we need to convince someone to lend us money. And to do so, we use a home that we want to buy as collateral. We pledge it as collateral in a loan. Well, the lenders, they want to make sure that the collateral is sufficient to cover the amount of money they might lend you should you fail to make your payments as agreed. And so the way that they independently assess the value of that property for lending purposes is through an appraisal.
And so it becomes a requirement that the appraisal be done. And by having an appraisal and an understanding of your credit, they are able to make you a loan at a low interest rate because they understand the risk very well. And that loan is secured by the home. So that’s how important an appraisal is in the process. That the lender cannot make a loan unless they know what the home is worth. The key variable is the loan-to-value. Well, the appraisal is the V in the “value” part of that equation, which is again, at the core of how they make lending decisions.
MBS:
Just a critical part of the entire ecosystem of buying a home. So if we look back over the past year, and we’ve already talked about how 2022 was really volatile, and I think no one really expected it to turn out the way it did in many ways. And the CoreLogic Home Price Index has really underscored for months now that the fact that the growth of home prices has slowed. So, at the same time though, inflation has just continued to rise at an exponential pace. So how will these two different market conditions affect the appraisal process?
ST:
Yeah, it’s been a very interesting time for sure over the last couple of years. So with real estate, everything is local. It’s hard to apply things nationally, though we can certainly study those things for trends. But currently, at this moment in time, we’re seeing the effects of the pandemic subside. And we’re seeing many areas of the country where the home prices are declining. But we’re still seeing a few areas where there’s upward pressure on home prices because of a limited supply and strong demand. Now, the interest rates going up as well are having a significant impact on the number of available buyers out there. So, it’s a very challenging time for all of the stakeholders, for lenders, for appraisers, for real estate agents and certainly for buyers to know what’s going on. And so we have to just look at each market uniquely and analyze those unique conditions.
And so, for example, an appraiser in the last couple of years has been dealing almost universally with upward pressure on prices. And so as they do their work and they analyze the market conditions, the homes that sold maybe two, three, four months ago may not represent the current market conditions because things have been moved up. And so the appraisers have to account for that in their, what are called adjustments process, as they estimate the value. But now, at this moment, they may be dealing with the sales in their comparison that had upward pressure four or five months ago, but now a more recent sale may have actually been in the downward pressure. And so you have this unique event where things are transitioning. And so the appraisers have to be able to understand the differences over time so that they can credibly estimate the value of that home, which is, as we talked about, critical for mortgage lenders as they make their decisions. And so it’s a very unique situation at this moment.
MBS:
Yeah, it really is. And I want to just dive into one thing that you just said there. You said that they make a comparison. How do they make that comparison?
ST:
When you buy a home, when we go out and we look for a home, we typically look at more than one. And so when an appraiser estimates the value of a home, they look for market-based evidence to show what the market is doing because the market, meaning the buyers and sellers, is what really indicates what something is worth. So market value is what a willing seller and what a willing buyer will agree upon. So a home that sold two or three months ago that’s almost identical to the home that’s being appraised, is a good comparison or substitute for that home with respect to value. And so the appraiser uses that evidence to say, “You know what? I got three homes that are almost identical to the one that I’m appraising, and they all sold for X, therefore the subject property is worth X.” And so the appraiser can adjust for minor differences like for example, a two-car garage versus a three-car garage, they can adjust what the market might do when it came to paying for the differences.
MBS:
Right, yeah.
That’s at the root of what an appraiser does, is to try to estimate and understand the market behavior when it comes to what people are willing to pay for a home.
MBS:
And also why it’s such a complicated profession as well too. It’s not just that you can say, “Nationwide the house has 2,000 square feet, four bedrooms, it’s this price.” You really do need to know each market and really compare what’s around it.
ST:
So, many nuances that are out there, and not only the physical characteristics of the home but let’s talk about supply and demand: availability. Sure. And so as if there’s a shortage of homes in an area and people want to live there, that puts upward pressure on the prices, because the supply is fixed, basic economics. And so that can also have a really interesting impact on the supply. As that shrinks, people will pay more. We saw during the pandemic, we saw people paying more than 50% of the time paying more than the list price because they felt like they had to secure that home given the limited supply.
And we saw people paying significantly more than the homes were appraising for, meaning they were willing to pay more than the market evidence said this home was worth because they wanted it. And so we’ve seen that stuff come back to normal now, back down. But for example, in Miami-Dade County, which I like to point that one out, we’re still seeing almost 25% of the homes being purchased for more than the appraised values, which is really unusual. Whereas the normal rate across the nation is about 6% or 7%. So still a lot of demand in that market.
MBS:
Wow. Yeah. It’s so interesting how different markets are very different as well. So, okay. I want to circle back to challenges a little bit. Something you started talking about — there’s been, in the news talk about how one of the big challenges with appraisals is the shortage of staff. And there was an NPR article in mid-year of 2022 that said part of the rise of moving towards more virtual and desktop appraisals was because of the lack of licensed appraisers. Can you talk a little bit about this?
ST:
Absolutely. The supply of appraisers is a fixed amount of individuals that are licensed. And one of the things that we’ve been looking at in the industry for the last three, four, five years, probably a little more than that, actually. Fannie and Freddie have been publishing some statistics that show the volume of lending relative to the number of appraisers that are in the marketplace actively working. And they have a centralized portal where the majority of the nation’s appraisals are submitted prior to selling the loan to Fannie or Freddie. And so they have a really good picture of this, but they show that there’s about 40,000 active residential appraisers. And if you look back 10 years, there were 40,000 active residential appraisers. And so that number is as flat as a pancake, as they say, as you look back 10 years.
Yet, if you look at the volume starting in 2020, the volume nearly doubled, in some cases tripled. Yet the supply of appraisers remained fixed. And so there’s the rub, as they say, as to where the shortage came in, is that if one week you’re getting 10 appraisals ordered and the next week you’re getting 30, you’re going to be really backed up fast. Another thing, Maiclaire, that’s important that was part of the ecosystem during the pandemic was the Fannie and Freddie issuing appraisal waivers. This was a new phenomenon that they had been doing these waivers since several years before that, but the percentage of the waivers was very small.
At the peak of the pandemic, almost 50% of the loans that Fannie, and Freddie made had some kind of appraisal waiver. And so that emphasizes even more the strain that was put on the ecosystem because a lot of the loans that would’ve normally required an appraisal did not need an appraisal. And that was a good thing for the market overall. Some people agree and disagree whether waivers are a good thing when it comes to risk, but certainly in a lot of cases, they made a lot of sense. So those two factors are interesting when we look at how much demand was on the appraisal community during the pandemic.
MBS:
That’s interesting. So, there are a couple of things I want to dive into there. I guess the first is, are there consequences to waiving so many appraisals?
ST:
That’s a really interesting question. Maiclaire, we could do two or three podcasts on that. But ultimately, an appraisal waiver is a lending decision based on an automated valuation, an AVM. And so Fannie and Freddie are using that as well as their very detailed knowledge of the property characteristics that they’ve collected over the years to know what their risk is. And it makes a lot of sense in some cases because if I’m Fannie or Freddie and I already have the loan and somebody’s refinancing it to a lower rate, it doesn’t really matter what the home is worth in that case because I already have all the risk and I’m just lowering the interest rate. And so I think in some cases they absolutely make sense. In other cases, it’s yet to be determined whether the risk is increased or decreased by using that type of an approach.
MBS:
Sure. Yeah. Wow. So interesting there. And you did talk about automated home values, and we have done a podcast on that before. And we’ll link that in the show notes also just to understand a little bit more about that process. The other thing too, I go back to when you were here at the beginning of 2021, Shawn, and that really in many ways was at the heart of the pandemic. And I remember you talking about how the pandemic was a catalyst for the transition to go to more digital. And I think it was the Federal Housing Authority that started to permit the use of digital appraisals back in March of 2020 because of social distancing rules. And then Fannie Mae and Freddie Mac followed after that. I think it was intended to be temporary at the time, but did it really transition the industry to be more digital?
ST:
I would say that it definitely was a catalyst. It opened doors, it created more opportunities. And since that time, desktop appraisals have become permanent. They’re part of the Fannie-Freddie Selling Guide now. So, they’re no longer a temporary authorization. They are absolutely part of the Selling Guide. And so they are normal and will continue to be part of how lenders operate. We have seen limited utilization of those products. However, the market, when I say the market, real estate agents, mortgage brokers, those that utilize them, they don’t fully utilize them when they’re allowed. In other words, they prefer to go with what they’re comfortable with, which are frequently the standard typical appraisals.
And so while they certainly have, I think, opened up new doors, they haven’t really moved the needle from my observation yet, but they’ve really created a new, I don’t like to say the word, but a new paradigm for how appraisers and others look at the valuation world. We’ve become very regimented in always ordering the full appraisal. But we’ve now opened the door back up to a risk-based approach. Meaning the lender is going to say, “I don’t need a full appraisal because my risk is low.” And that makes sense, and that’s just common sense.
MBS:
Okay. No, that’s really interesting. Something else we talk about a lot on this podcast is innovation and desktop appraisers are not the only innovation in this space. The property technology, or PropTech, as we call it, is a large umbrella term. So can you talk a little bit about what you’re seeing with innovation within the industry and what these opportunities mean for development across appraisals?
ST:
Sure. Sure. So there are many different avenues that are happening right now. I think one of the main ones that is at the root of this is, again, back to the pairing the risk with the type of valuation product. Historically, appraisers have gone to the home, collected data, made observations, taken photos, measured the home and then brought that data back and combined it with market data to form an opinion of value. So there were really two distinct functions of the appraiser. One: collect the data. Two: analyze the data and form an opinion of value. What we’re seeing is the separation of those two tasks. We’re seeing the industry embrace solutions that allow a different third-party to go out to the property, collect data, create photos and images, videos, three-dimensional scans. And also one of the latest innovations is tools that will actually scan the home and create a floor plan that’s digital.
And calculate the square footage rather than the appraiser drawing it on a computer and so forth. We’re seeing that the root is this separation of responsibilities, allowing the appraiser to become focused solely on the analysis and the appraisal, and letting other people that maybe can be more efficient, go out and collect the data. Back to the shortage of appraisers. If I am personally required to go to every home that I appraise, I can only do so many per day. But if I can sit at my desk and do the analysis and somebody else collects the data, I may become twice as efficient in the amount of work that I can do because we can utilize a bigger or different workforce to collect that data. So those are some of the main innovations, especially the scanning of the homes, that seems to be really pushing forward. And then just automating the data collection through apps and seamless tools that are… So some of it’s exciting and sexy and others routine just to make the standard processes that we are going through more efficient.
MBS:
And just really moving something that’s hundreds of years old into the 21st century in many ways, too. To finish up today, Shawn, I want to talk about trends. We’re kicking off this new year — 2023 now. It’s hard to believe, but that’s where we are — What is coming up for lenders and appraisers, and I guess even for homeowners, that they should maybe pay attention to when it comes to appraisals?
ST:
The volume slowdown is creating some interesting opportunities for innovation to stick, people need to be efficient. They’re thinking about how to solve problems now, whereas a year ago, everybody was so busy, you were just trying to process what you have in the pipeline. Some of the trends that I think will start to stick this year are, again, more of the separation of the data collection and the appraisal process. So for homeowners, it may be that someone other than an appraiser visits their home. Or no one visits their home. Or they’re asked to use an app that lets them walk around the house with their phone while the appraiser is sitting at their house watching the video-ing of the home and collecting data via a remote inspection. Those are some things that we’re almost certainly going to see. For lenders, we’re going to see more options for getting valuations, meaning instead of just the traditional standard appraisal, we might see a lot of variations where in some cases, the waiver works.
In some cases, the lender can get a waiver if they send someone out to collect data, and then they verify information. In other scenarios, we’ll see hybrids they’re called, which are a combination of data collection from one person in the desktop appraisal. And then we’ll still see traditional appraisals. But we’re going to see lenders be smarter because the Fannies and Freddie’s of the world are opening the doors and allowing for that. And part of that is also to ensure that the appraisers we have, that there’s sufficient coverage, that they’re able to equally serve all communities across the U.S.
MBS:
Wow. So interesting. Shawn, thank you so much for joining me today on Core Conversations: A CoreLogic Podcast.
ST:
Alright. And thanks to the team for helping bring this podcast to life: producer Jessi Devenyns, Editor and sound engineer Romie Aromin, and social media duo Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.