The appraisal system in today’s housing market is broken — at least, that’s the conclusion of a Wall Street Journal story, “Appraisals Weigh Down Housing Sales.”

Appraisals are supposed to be unbiased assessments of a property’s value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don’t appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.

How much are low appraisals hurting? According to NAR, this past June 16% of Realtors reported a sale being killed because of the appraisal — but that’s up from 9% in June 2010.

A survey by [NAR] earlier this year found that 10%-12% of members had a contract canceled last year as a result of a low appraisal; 10%-13% had a contract delayed; and 16%-20% reported that the sales price was negotiated lower due to a low appraisal.

But it’s not that these folks aren’t good at their jobs. It’s a bit more complex.

Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.

The result has been that appraisers with less experience or who are unfamiliar with a community—but who work cheap—are getting assignments while more experienced appraisers are going out business. That, say critics, is producing appraisals that are less accurate.

image Sound familiar? We covered this very subject back in 2009, in our story on the Home Valuation Code of Conduct, where we talked about the effect of appraisal management companies (AMCs):

“What has some in the business gnashing their teeth is that the low fees so many AMCs seem willing to pay — that encourages appraisers with less experience while discouraging those who have been on the job longest. And that, they say, means consumers are more likely to get an appraiser with fewer miles under the belt.

And even if the appraisal is technically spot-on, that doesn’t mean it won’t cause trouble. The Journal quotes John Pennie, a seller in Georgia who agreed with a buyer on the sale price of his home. But then the appraisal came in at $38,000 less, and the deal collapsed.

“Understandably in a declining market, you’re going to have declining appraisals,” the Journal quotes Pennie saying. “But when you have two parties who agree on a price, to then have an appraiser come in and make it $40,000 below…how do you ever get out of a falling market?”