The appraisal gap in 2026

Real estate valuations have customarily leaned heavily on historical data as one of the most important factors used to determine the appraised value of homes. This data includes comparable transactions and cap rates from prior years, along with historical real estate market data. However, there are a few areas that the past-anchored valuation system fails to build into the appraisals, leaving an appraisal gap that is becoming difficult to ignore in 2026. For lenders, this creates a problem when appraisals fall short of the initial estimated property value, or exceed it, and loans need to be restructured as a result. 

Major climate events

An important lesson that has been discovered more recently in the real estate industry is that not all properties in climate-impacted or high-volatility markets fit standard comps. This means that the insurance industry has had to make adjustments around forward-looking models that factor in major climate events like flooding and wildfires. As a result of recent climate incidents, many insurers have pulled out of high-risk markets, and transaction volume has dwindled. As a result, appraisers are left using fewer, older comps that are outdated and don’t reflect the current market conditions. This has all culminated in significant appraisal gaps in these areas. 

The AVM issue

The latest technology in real estate has pushed lenders towards Automated Valuation Models (AVMs) as a faster appraisal tool. However, AVMs are another factor contributing to the 2026 appraisal gap problem. While these models help lenders speed up their loan processing, the accuracy of AVMs is not flawless when the underlying data is sparse or outdated. To help combat this, regulations were put in place in October 2025, which require lenders to use quality control standards for AVMs being used in credit decisions.  

Fewer comparable properties 

For several years, mortgage rates have been elevated and constraining the market. This has meant that comp volume has been lower than pre-pandemic times. Less transaction data means less data for appraisals. It also means that the appraisal data is a little less accurate, increasing the likelihood of an appraisal gap. As rates slowly start coming down and the market shifts into a more active space, this is a natural solution to this problem. However, as with most things in real estate, the correction will take time. 

Geographic impact

According to the NAR, one of the defining factors impacting the market in 2026 is geographic shifts. Markets with newer homes are slowing down in areas that were once bustling, while other markets are strengthening. When it comes to a national appraisal model, there’s no way to account for all these local nuances, so geography has become one of the most important variables in the appraisal gap equation.  

While appraisal gaps are nothing new, 2026 is showing us a different version of them. Traditionally, appraisals would come in below the contract price in busy markets, but in 2026, appraisals are coming in higher than the contract price. In fact, statistics show that only around 10% of home appraisals are below the asking price. While the gap may be going in a different direction, the result is still the same, inaccurate valuations leave both lenders and borrowers with a problem to solve. 

How originators can weather the appraisal storm

The effect of appraisal gaps on loans is longer lock-up periods, more extensions, more renegotiations, and ultimately a higher rate of deals falling through. To stay ahead of this, originators need to consider a few solutions for managing appraisal gaps as the second quarter of 2026 begins. 

Start by building the appraisal gap into the loan structure from the beginning. Deals should factor in all the risks associated with appraisals. Whether that’s through insurance or a higher down payment, an appraisal gap needs to be accounted for, and building that into the loan structure early on provides both lender and borrower with a safety net. Developing an internal appraisal risk score can also be useful to sort deals into low, medium, and high appraisal risk off the bat. 

Environmental due diligence needs to improve, which means that climate checks may need to be done manually to rule out any errors. Along with this, there should be a shift to a more forward-planning climate risk analysis of each property. Climate risk data needs to be a standard part of the loan origination process, so that lenders can make better decisions upfront on how loans should work in high-risk zones. Geography can be used as an early signal for climate risk and to plan accordingly, because the appraisal most likely won’t be factoring that all in. 

Hybrid valuation workflows make the most sense in 2026, with AVMs still coming in useful when paired with a wider dataset. The goal is to flag the high-risk properties as soon as possible and make sure to implement the right structures to mitigate any potential appraisal gap. 

Climate volatility, geographic divergence, thin comp pools, and the limits of automated modeling have all landed at the same time. The appraisal gap in 2026 reflects an older version of the market, and a pivot is required. Lenders who build the appraisal risk at the front end of their loan process will be better prepared for future gaps. 

Kirill Bensonoff is the CEO and Co-Founder of New Silver Lending.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].