Appraisals prevent refinance

1. Think about it. You are an appraiser. All the appraisals you did for the last 3 years are "wrong." And every media outlet claims you made a mistake by "over-valuing" houses. They question your integrity. What do you do today to compensate? .... Undervalue. So current owners can not refinance their own home and get a lower interest rate. Does this mean appraisers are now operating with more integrity now than in the past? Or less?

2. It gets worse. One method of appraising is "Capitalizing" the expected cash return. This is not normally applied to houses, since houses don't have an "income stream." (Or do they? Isn't a mortgage payment a negative income stream?) The "cap rate" is normally related to the interest rate on a loan. The appraisal process incorporates sophisticated arguments, but basically just divides the income stream by the "cap rate." Apply that approach to the 7%, 30 year, $100,000 house loan. The monthly payment is $661.44. Cap that at 7% and the "value" is $113,000. ($100k/7% x 12).
Now cap it at the current mortgage rate of 4.5% and the "value" is $175,000. The lower the interest rate, the higher the value of the home.

Of course it makes intuitive sense. The lower the monthly payment, the more likely the borrower can make the payment, the more secure the loan. Lower the interest rates!

3. "The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can't grow." -LA Times. What if these underwater borrowers lived on Cove Street and just got the lower rate but did not lower their monthly payment? Assume they are currently 75% underwater. With their current 7% interest rate, they would take over 14 years to reduce the principle to 75% of their original balance. After 14 years, their home is now worth the amount of the mortgage. After 14 years, they can trade up.
However, if rates were dropped to 4.5% and they kept making the old monthly payment, it would take less than half that time. And, if houses stop depreciating, (which they will if rates are dropped), and modestly appreciated (which they will if rates are dropped), then that 6 years compresses to less than 5. They can trade up in less than half the time. Drop the interest rates!