If you are trying to sell your home in this market, your biggest challenge probably is ... the foreclosure down the street. Not only do you have to compete in price with it, but that foreclosure is going to factor into your appraisal as a comp, possibly scuttling a deal. Is it fair? Probably not.
The key insight of this article derives from appraiser Edward Madson:
"The way the banks feel is, they want the lowest value possible," said Edward Madson, of Madson, Brown & Assoc. Real Estate Appraisers. "They are worried the statistics for Arizona (show) that it is a declining market."
Not only are lenders pushing appraisers to include foreclosures as comparable sales for non-foreclosures, but they are also limiting appraisers to finding sales within a one-mile radius and three months time, Madson said.
Banks don't have any agenda about low or high values, they want "accurate" and "conservative" values, because if the borrower defaults selling the house is how they get their money back. A tightening of appraisal rules was inevitable after the abuses of the past few years but even without that motivation in a market where more than half of all sales are foreclosures ignoring them as comps is simply nonsensical. I certainly didn't hear many RE journalists whining about including guaranteed-to-default-option-ARM-funded-8x-income purchases as comps during '05 and '06.
What's important about this phenomenon is that it can be a self-feeding cycle, just like inflated appraisals were on the way up. As more houses are valued based on foreclosure comps values will sink, equity will disappear, and more homeowners will be underwater, increasing the likelihood that they will also default. For cities like Tucson and Phoenix that saw huge bubbles (cf. Housing Doom) the result could be catastrophic. In January Tucson was already 19th on the list of top subprime foreclosure areas, this is unlikely to help tamp that down.
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