As lumber prices soar to record highs, new-home appraisals have become a growing concern as existing standards don’t always acknowledge the impact of higher materials prices in the valuation of new construction.
The National Association of Home Builders (NAHB) wants to make sure builders understand that it is acceptable to speak with the appraiser and provide relevant information needed to accurately assess a home’s value.
NAHB is encouraging home builders to consider using the cost approach. Using this method, the appraiser estimates what it would cost to rebuild or construct an equivalent structure. This valuation approach considers the cost of materials used to construct the property and can be helpful for analyzing the value of a newly constructed home.
Builders that use the cost approach should understand that it’s always used in combination with the sales comparison approach, and that more weight is given to the sales comparison method, in line with guidance from Fannie Mae and Freddie Mac.
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NAHB has created a web page to help builders understand the cost approach to valuation. The web materials include an outline for creating an “appraisal binder” that provides a cost breakdown of all the materials used in the construction of the home. Home builders can provide this information to an appraiser in order to help them balance the market value of the home with the cost of materials needed to construct it.
To find these resources, go to nahb.org and search for “understanding appraisal approaches.”
HMI Shows Builder Confidence Declined
The latest NAHB/Wells Fargo Housing Market Index (HMI) shows that confidence among single-family home builders declined two points to 82, largely over concerns about rising prices for lumber and other building materials.
Builder confidence peaked at an all-time high of 90 last November and has since trended slightly downward. However, any number over 50 indicates that more builders view conditions as good rather than poor, so overall confidence in the market remains high.
The modest decline in March 2021 came despite robust sales traffic and strong buyer demand. Recent increases in material costs and delivery times, particularly for softwood lumber, tempered builder sentiment. Supply shortages and high demand have caused lumber prices to jump about 200% since April 2020, adding roughly $24,000 to the price of a new home.
For more information about how the NAHB/Wells Fargo Housing Market Index is calculated, visit nahb.org/hmi.