Thank Denis- (Partial Post of Article)
Demand for Appraisals
Demand for appraisals comes from the number of unique home sales and refinances. Nearly all home purchases, new or existing, require an appraisal. To forecast the volume of new and existing home sales, the number of households was forecast based on a 20-year projection from the Harvard Joint Center for Housing Studies
[2] and augmented with the average growth rate from the Harvard study. Demand for both owner and renter occupied housing is correlated with household formation. The historic ratio of number of new and existing home sales to households in conjunction with the new forecast of households drove the forecast of new and existing home sales. Note that demand for both new and existing sales rise over time with population growth. The grey and green areas represent refinances and HELOC/improvement loans, which are assumed to decline and plateau going forward at a fixed share of purchase demand in a rising rate environment.
[3] This assumption is an over simplification but represents a conservative estimate in that an increase in refinances from this assumption would create more demand for appraisers.
However, as evidenced by both Fannie Mae’s and Freddie Mac’s recent forays into automated appraisals, automation will have a significant impact on the industry. Public statements by Fannie Mae indicate that as much as 10 percent of refinance mortgage will be automated, but discussions with industry analysts and experts suggest that it could be higher, include purchase mortgages, and might someday include government-backed mortgages (FHA, VA, etc.). As depicted above, the green and yellow dashed lines represent total demand under different levels of automation, which subtracts from total demand. The different levels of automation are:
- Baseline – 10% of all GSE refinance mortgages
- Low GSE and FHA Automation – 20% of all GSE and FHA purchase and refinance mortgages
- High GSE Automation – 50% of all GSE purchase and refinance mortgages
- High GSE and FHA Automation – 50% of all GSE and FHA purchase and refinance mortgages
Furthermore, the GSE’s share of the market is assumed to moderate toward its historic norm of roughly 40 percent, while the FHA’s share moderates as well to 18 percent by unit volume. These latter assumptions could change with GSE reform, but lower shares would suggest lower take-up of automation and therefore more demand for appraisers’ services.
Supply vs. Demand: Defining Stress
In 2016, there were widespread anecdotes of appraiser shortages, delays, and “rush order” fees. As a result, the ratio of appraisals needed (e.g. new and existing sales with refinances) relative to the number of appraisers in 2016 was selected as the benchmark for stress as depicted by the pink dashed line in the chart below. An increase in the ratio suggests growing strain and a measure above the 180 average appraisals per appraiser indicates higher stress than in 2016. Four scenarios are depicted below each with a varying degree of automation as discussed earlier. In all periods there is a short-run improvement as automation takes hold followed by increasing stress as boomers exit the industry and population-driven housing demand continues to grow.
What if training improves? In the chart below, the same four scenarios of automation are depicted, but with a higher rate of new entrants to the appraisal field, 2,087 persons per year as in 2008. With this change each scenario improves and the time to return to or approach stress levels is postponed five to ten years. However, the stress levels are breached in each scenario except for “high GSE and FHA automation” for at least a year and under moderate levels of automation stress is maintained. Even under high levels of automation, the appraisals/appraiser ratio is elevated in the mid-term.
Appraisals: The Future is Mixed
While some have bet the future of the appraisal industry on automation others are less sanguine. This analysis suggests that even with high levels of automation of appraisals, there remains a need to increase training of new entrants to the appraisal industry. Furthermore, this analysis does not account for distortions within the industry such as factors that exacerbate the demand for FHA, VA, and rural appraisals. In a future of growing demand for and declining supply of appraisers, strain on these submarkets would likely outpace the general strain on the industry.
