May Existing Home Sales fell short of expectations. Month over month home sales only increased 2.4% versus expectations of 3%. This is notably weaker than the strength of the pending home sales reports where the latest report was a rise of 6.7%. There is true irony in the shortfall. Normally, in this environment, the finger would quickly be pointed at the banks, but that is not the case. The National Association of Realtors has pointed the finger squarely at the appraisers. According to NAR, “However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan,” and “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales.” The 180 degree reversal in appraisals illustrates the essence of the bubble-bust environment in which we live. Just 3-4 years ago, it seemed as if appraisers added value to a property simply because the sun came up that morning. Fraud was rife, and as we all know, many unqualified buyers bought homes they could not afford. Today, asset values have significantly corrected, housing has been in a 4 year downturn, we are 18 months into the longest post war recession, and as buyers finally materialize, the appraisers are afraid to give the valuations that support the prices buyers are willing to pay. There are essentially $10.5 Trillion in mortgages out there and a significant portion of those were made at higher price levels. Now, when the smart and patient buyer steps in at low levels, the valuation is an issue. In any market, if someone does not pay above the last sale price, then you will never see a rally. Homes are not nearly as liquid as equities, but the self interest of free markets will prevail (sorry, free markets with government subsidies). Obviously, it is preferential to see these deals closing, regardless of the distortion in the market place. It is still a positive sign that trends are shifting in the right direction.