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When Appraisers Go Low, Contracts Go Lower: The Impact of Expert Opinions on Transaction Prices

Author

Listed:
  • Hamilton Fout

    (Fannie Mae
    Kansas State University)

  • Nuno Mota

    (Fannie Mae)

  • Eric Rosenblatt

    (George Washington University)

Abstract

Using home purchase loan application data, we study buyer responses to the uncommon occurrence of the appraised value coming in below the contract price (i.e. a low appraisal), which sharply raises the probability of downward price renegotiation. We propose that two mechanisms drive the higher renegotiation rates. First, a liquidity channel, visible for financially constrained borrowers for whom a low appraisal impacts financing costs. Second, for financially unconstrained borrowers, we identify a news channel whereby the information content of the low appraisal alone induces borrower renegotiation. Importantly, we show that low appraisals result in lower renegotiated prices through these channels without a substantially lower likelihood of a loan application leading to loan origination or notably longer times from contract signing to sale.

Suggested Citation

  • Hamilton Fout & Nuno Mota & Eric Rosenblatt, 2022. "When Appraisers Go Low, Contracts Go Lower: The Impact of Expert Opinions on Transaction Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 451-491, October.
    • Handle: RePEc:kap:jrefec:v:65:y:2022:i:3:d:10.1007_s11146-020-09800-6
    DOI: 10.1007/s11146-020-09800-6
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