A new CoreLogic report suggests that first-time homebuyers are at a higher risk of overpaying for their purchases, because appraisal gaps are more widespread over starter homes than other properties.
Appraisal gaps happen when the appraised collateral value of a home falls short of the agreed-upon sales price. In many of those cases, lenders may affix an added cost to homebuyers to cover the difference, and sometimes, lenders may deny the loan outright if they deem the risk too large because of the collateral disparity.
The occurrence of such gaps is generally normal; the rate of appraisal gaps shift seasonally and month to month, typically fluctuating from 6% to 10%. In June, 8.6% of all home sales in the closing process were appraised under contract price. That’s actually down from 10.7% in the same month last year.
But the smaller units that are affordable to most first-time buyers are the properties that are most likely to have their appraised value come up short of the agreed-upon price. In June, for example, 9.6% of starter home sales saw an appraisal gap — a full percentage point more than all home sales at large. In June 2023, that share was at 12.1%, nearly one and a half percentage points more than all home sales.
Historically, that correlation has generally held true. Starter homes are the only tier of homes by size where appraisal gaps are more common than they are in the market as a whole. One percentage point may not seem like much, but it does mean that many first-time homebuyers staring down likely the largest financial commitment in their lifetimes to date are ending up with extra unforeseen costs tacked on during the tail end of their homebuying process.
CoreLogic noted that the prevalence of appraisal gaps among starter homes becomes even more stark when compared to large, more expensive homes with at least 3,500 square feet of space. On average, the difference in appraisal gap rates between the two categories of homes fluctuates between 3% and 5%; this past June, for example, just 7.1% of homes of at least 3,500 square feet had an appraisal gap. But during housing boom periods (when the occurrence of appraisal gaps usually increases), that difference can stretch as wide as 8% or more. During the June and July of 2021, in the height of the pandemic homebuying frenzy, the appraisal gap rate for starter homes reached 21.5%, while the rate for larger units topped out at about 13.5%.
