Portland Real Estate

Who Sets Portland Real Estate Prices, Appraisers or "The Market?"

Appraisers have a role to fill in the market. Essentially, their job is to police loan officers and make sure they are not writing loans on homes that are not worth the amount of money being loaned against them. On the other hand, appraisers in a very real sense, are only following the market, not making it, and I'll explain why.

The role of the market

The "market" is a tricky thing to define, because it is really made up of many competing and aligned interests. Adam Smith, a writer in the 1800s, wrote there was an "Invisible Hand" guiding a market to set the correct price for a product or service, and that has proven to be true...unless government or other forces interfere with, or otherwise distort the market.

Let's say you live in a subdivision where there are several homes with the same floor plan. All things being equal, the homes should appraise at exactly the same value. But alas, all things are not equal, so the market will not price them equally.

One home may be near a noisy street, or the other one may be in disrepair. One may have had a new roof put on last month, while the other may have had brand new landscaping added last summer. The two properties are not equivalent, but they serve at least as a basis for comparison. Appraisers might call them "comparables" if they've been bought or sold recently. That would tell them what the market "thought" they were worth in "real life."

That's because appraising or assessing the value of a piece of Portland real estate is only theory until money actually changes hands. When money is actually at stake, all theory gets thrown aside. The property is "worth" that amount because someone paid that amount. It's as simple as that. We can argue whether it should have been worth that amount, but the fact remains that it was, at that moment, worth the amount paid for it. That's the market speaking.

The role of appraisers

Appraisers have a unique role in that they are not stakeholders in the transaction, but they are hired as (theoretically) independent observers as to the value of a property. A bank, or any one on the buying side of a transaction, may want a third party to verify that their purchase is "worth" the loan they are taking out on it.

Because they are being hired (typically) by the party making the loan, it is not true that they are unbiased. Depending on the market they are operating in (even conservative appraisers have to appraise some high values in a hot market, because the market is the final authority on what real estate is worth), they may be pressured to return a higher or a lower value than they would otherwise. They are not unbiased, but they are at least supposed to be dispassionate and not have a personal stake in the outcome.

So do appraisers set property values for Portland homes?

The bottom line is no, they don't. Appraisers are an important part of the process of determining home values primarily because their assessment can influence a money lender to make or not make a loan.

In this way, their influence on property values is indirect. A homeowner prices a home too aggressively for the neighborhood or current market conditions and the bank's appraiser says "no, I don't think it's worth that much." The homeowner is faced with a choice: Find another buyer or lower his price. Faced with that choice, he will probably lower his price so he doesn't lose the buyer.

Even still, many home purchases go through without the use of an appraiser. Private wraparound mortgage situations are one example, where private money is used to buy the property rather than bank money.

It is fair to say that between the market or appraisers, the market is the final arbiter of what a property's value is. Appraisers are an important part of the process of valuing a property, but if there are three offers on the table for a property at $200,000, and three appraisers say it's worth $185,000, the appraisers are wrong. The market has determined that the property is worth $200,000.

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