During the past several years, we have witnessed spikes in home prices that soared beyond most people's expectations. Annual increases of ten, fifteen, twenty percent or more have been common in certain areas of the country. Generally speaking, that's good news for most people and for the economy, certainly for those individuals selling and facilitating the sale of real estate.

But, with interest rates rising and the state of the economy uncertain, many housing experts are beginning to talk publicly about an issue that few in the industry have wanted to confront in the past– appraisal inflation.

Some people argue that there is no such thing as appraisal inflation. After all, we live in a free market society, and if a buyer is willing to pay an asking price, then the price isn't inflated. True enough. But, when appraisal inflation becomes systemic to the loan process and when almost of half of appraisers say they are pressured to inflate appraisals by others involved in the loan closing, then we need to take a closer look and determine exactly what is happening.

One of the nation's leading providers of market intelligence to the real estate services industry, October Research Corporation, released a survey last year that found appraisers are succumbing to pressure to "hit the price" from sellers, lenders, real estate agents, and others with interest in a loan closing.

No one can be sure how many homes are overvalued right now in the U.S. housing market and for how much. However, if the October Research survey is correct -- that over half of the appraisers surveyed have been pressured to inflate values by 10 percent -- then we should assume that appraisal inflation has the potential to wreak havoc on the bottom lines of homeowners as well as lenders, should housing prices stabilize or decline. (The survey also found that one-third of the 500 appraisers surveyed said they feared losing business if they did not comply with request to inflate values, and practically all appraisers said they think appraisers give in to pressure to inflate values.)

Real estate agents, Realtors, brokers and others in the real estate industry should be concerned about this issue and emphasize the importance of accurate appraisals to their clients. The National Association of Realtors, local real estate boards and other advocates in the real estate profession should call for greater independence between the appraisers and others involved in the loan process – the sellers, brokers, agents, lenders and title companies. We also need clearer separation of lines between the appraisal process and the actual making of the loan to the borrower.

We have laws and regulations on the books to ensure this independence; however, they clearly haven't prevented appraisers from feeling the pressure to "hit the price." Tougher enforcement and greater federal oversight from the five agencies that regulate bank lending would be an important first step in solving this problem.

As in any business, client satisfaction is the number one priority for those in the real estate business. While there is no profit guarantee in real estate, no one likes to lose money. Appraisal inflation of $10,000, $20,000 or $30,000 is money the homeowner will never recoup. Once a client determines that he or she overpaid for a house, then that client will never return, much less refer a friend, for a home purchase or sale.

And, while we do not wish for bad housing news, we should nonetheless prepare for it. Inflated appraisals force a tumbling housing market down faster and harder. Aside from the individual homeowners, the real estate profession feels the impact the most. For this reason, we should not allow our exuberance over home prices stand in the way of protecting consumers and the economy from overpriced housing appraisals, which could, in combination with other financial factors at play, create enormous instability in the nation's highly-leveraged housing finance industry.

William Apgar is the Senior Scholar at Harvard's Joint Center for Housing Studies and Lecturer in Public Policy at Harvard's Kennedy School of Government, a former FHA Commissioner, member of Advisory Board, AMCO, an independent valuation management company, based in Cleveland, Ohio.