What do you do if you are a politician concerned about declining home prices? Simple. You do what politicians do - create a law designed to raise prices.
In Illinois, Maryland, Nevada, and Missouri legislators have proposed laws that would prohibit the use of foreclosure sales in appraisals. The Illinois law, HB 0092, would be in effect for the next 5 years and would prohibit appraisers from using "a residential property that was sold at a judicial sale at any time within 12 months" as a comparable sale. The Illinois law was introduced by Rep. LaShawn K. Ford of the 8th district.The Maryland law was shot down after outrage erupted over its stupidity.
No surprise that a lot of members of the real estate community support legislation like this. Apparently the NAR claims that 1/4 of all deals are falling through because of low appraisals. The basic argument of these industry cheerleaders is that it's not fair to compare "regular" homes to foreclosure sales.
Let's review some of the issues here:
- Didn't we get into all of our mortgage mess with inflated appraisals?
- Aren't foreclosures part of the market? After all, in Chicago over 50% of all sales are distressed.
- I will agree that if a foreclosed property was not in the same condition as the subject property then an adjustment needs to be made. That's what appraisers are supposed to do. But to legislate that foreclosures be excluded entirely?
- The Illinois law does not provide for any sort of exclusion for appraisals on foreclosures! So in these cases direct comparables can not be used at all and the appraiser needs to introduce a reverse bias. LaShawn didn't think of that one did he?
There is no end to the dumb ideas that politicians can come up with. Why not pass a law that all appraisals should be made for 25% more than the proposed purchase price? That will really solve the housing problem.