Why Appraisals Become More Challenging in a Slowing Market

Appraisals become more challenging in slowing markets, and that was clear across the Greater Atlanta region over the last two years. As '26 opens, the market is likely to remain stable as the balanced market continues. Given that, it's prudent for buyers, sellers, and agents to understand the challenges inherent in appraising homes in slowing markets. The most obvious thing is for all parties - particularly agents - to acknowledge the market; price the home accurately based upon the data. There's no mystery around this, but it's also the foundation of the majority of appraisal issues.

To add to the mix, Fannie Mae and Freddie Mac are introducing the new UAD 3.6 format alongside the current one. The new format will be mandatory beginning Nov '26. An exceptionally strong move to further diminish the role of appraisers, more on that looming disaster later.

Some of the dynamics at play that can make appraisals challenging in a slowing market include:

Fewer Comparable Sales / Stale Comps
When market activity drops (fewer closings, longer days on market), appraisers have fewer fresh and relevant “comps” (recent sales of similar homes) to support value. Underwriters use standard guidelines when it comes to comps; distance, closing date, required adjustments, and more are evaluated and outliers noted. Comps closing over six months, over a mile away, with high net adjustments, might be the best available but still trigger a flag. This is increasing due to the use of AI reviews. Reports are expected to "fit into the box" and when that doesn't happen, they are flagged.

Price Growth Flattens or Declines
When home-price growth slows (or turns negative), the “contract price” becomes weaker support for what a lender will accept. While "the market (a buyer)" might be willing to pay a certain price,  lenders rely on the appraised value for their loan and what they are comfortable financing. Every micro market is different, so when comps are limited in a market, appraisers often have to expand their search. Buyers often stretch for the "right" home; they have certain requirements and "value in use" is something they consider. However, appraisers are held to underwriting standards and base their appraised value on the data available at the time. 

Increased Inventory / More Negotiation → Pressure on Pricing
In many markets, when supply rises and demand softens, listings linger. As homes sit, prices tend to drop, seller concessions increase, and homes sell for a lower “sale-to-list” ratio. Appraisers must capture those weaker trends. In every report is a detailed analysis of the subject market and trends over the last year. Underwriters look at key market indicators - months of inventory, days on market, number of price reductions, sale to price ratios, and sale price. If the appraised value is below contract price, deals do not have to fall apart, but they will be renegotiated.

Lagging Data & Changing Market Direction
Appraisers depend heavily on data (historic sales) which may lag current market realities, especially when a market has shifted from strong growth to flat or declining. Closed sales capture the market when the comps closed, and that might be up to a year from the date of appraisal. Appraisers consider the "active" and "pending" listings in their overall market analysis, it's a reliable look at current conditions and is used to balance closed sales data. Ignoring market trends can lead to inaccurate reports that both over or under value the home in question.

Increased Scrutiny From Lenders/Regulators
When values get “out of sync” with market reality, lenders and oversight agencies may impose more scrutiny, reducing flexibility to accept high appraisals or non-standard adjustments. The post pandemic market was crazy hot, once rates jumped it literally hit a wall. Appraisers had a very difficult time in both circumstances. Slowing and balancing markets typically see lenders complete tighter reviews and become more conservative.

Reduced Value Add From Updates
The pandemic saw a record amount of renovations as owners were trapped at home. As the markets cooled, the contributory value of those updates wanes. Consider as well that prices for work like pools, kitchens, baths, basement finishing were at a major premium. Now a few years later, that pool likely costs 15-20% less and it's four years old, it's simply not going to contribute what many sellers think. While improvements are typically a positive, the return on investment recognized by the market may be quite different that what sellers expect. 

Sellers and Agents
What a seller paid, what they think, what the neighbor thinks, or what Zillow thinks are all unreliable and irrelevant. No one cares what a seller paid in '22 when they outbid 20 other buyers. A home is worth what others like it in the same competing market are selling for. Of course every home is different, but the appraiser is compelled to use appropriate data in their evaluation, not emotion. Many agents contribute to the problem of overpriced homes. Rather than be honest, many will list for what the seller wants and then wait for them to reduce. The idea is an industry norm, "list to live" is a common agent refrain. This does no one any good. 

There's been more change in the housing market in the last few years than in the last several decades. Most of it is not good for the consumers. The appraisal process continues to change as things move from a professional, independent analysis to "fill in the boxes". The industry as a whole is quickly moving to an "automation line" style; a real estate company shows a buyer homes (first from their own inventory), pushes them to their lending arm or affiliate, off to their affiliated closing and title company, then to their insurance company. The goal is to keep them in house and profit from them at every step. 

For consumers, the warning is clear - understand and research this process. Qualify your agent and ask a lot of questions.

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• appraisals (6)
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