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Home Publications Blogs Beat the Press Inaccurate Appraisals Don't On Average Prevent Home Purchases

Inaccurate Appraisals Don't On Average Prevent Home Purchases

Wednesday, 20 March 2013 05:14

A Morning Edition piece on the housing market blamed difficulties in the housing market in part on people being unable to get mortgages because of inaccurate appraisals. In fact, this should not on average reduce sales. While some sales will be prevented by an appraisal that wrongly comes in too low, some sales will go through that should not because an inaccurate appraisal comes in too high. Unless there is some reason there is a low side bias to the appraisals, inaccuracy by itself should not affect total sales.

Comments (9)Add Comment
Doesn't your comment assume roughly flat wealth distributions?
written by Randall Smith, March 20, 2013 6:30
Doesn't this lack of impact you note require that there be a roughly even distribution of buyers with the available funds? If, to take an extreme example, the universe of buyers existed of people able to afford homes up to $200k but not a penny more, then appraisals that were inaccurate but under $200k would have little effect, I agree. But those that put the price over $200k would kill all sales. All that's needed to make this realistic is to assume a sharply peaked distribution of income -- which does exist, we know.
Possible Reasons For Low Side Bias
written by JerryN, March 20, 2013 7:49
Off the top of my head, I can come up with a plausible reason for a low side bias (obviously this is pure conjecture). Appraisals are likely to lag the market since they rely to an extent on recent comparables. In a slow but recovering market, this is a double whammy. One, since activity is low, the time period needed to find comparables may be longer than usual. Two, these prices are probably lower than current conditions support and include a higher than usual percentage of distressed sales.
Yes there should be a low side bias it is called a Bubble
written by Jay, March 20, 2013 8:33
"..Unless there is some reason there is a low side bias to the appraisals.." YES! Housing prices have been going up in some areas at rates well over 10%. Unless the houses were way undervalued this represents a bubble. A correctly done appraisal should value the house minus any bubble in order to protect the bank. The real story is almost certainly about why housing prices are going up at incredibly crazy rates and why there isn't an even more of a "..low side bias..." in appraisals.
Motivation & Survival
written by James, March 20, 2013 9:57
Appraisers who operate independently need to have enough appraisal assignments to survive. They get assignments from folks who need them including financial institutions, mortgage lenders, insurers, etc., who have a list of supposely pre-screened, Board of Directors approved appraisers.

Everyone knows a deal doesn't go forward without certain price range. Those appraisers who failed to make them happen won't get selected for future assignments.

There are USPAP and appraisal program built in to ensure independent selection of appraisers from the production side - this is how it supposed to work.

Reality - if any net bias, it's the upside. Sales comps don't ensure much bc there are always qualitative adjustments.
Institutional investors
written by David, March 20, 2013 10:41
... Have a large presence in the market lately. They are part if what is driving up prices.
written by Austin Kelly, March 20, 2013 12:24
your conclusion doesn't follow from your premise. The symmetry or asymmetry depends on what the offer distribution looks like. Take an extreme example - all offers are exactly at the "true" price. A high appraisal does nothing that a "correct" appraisal wouldn't do, while a low appraisal kills the deal. Take a slightly more complicated case - half of offers are 5% too high, and half are 5% too low. Appraisals are uniformly distributed at 10% too low, 5% too low, 5% too high, and 10% too high (25% each). Offers and appraisals are independent. 75% of the low offers will go through, and 50% of the high offers will go through. Do a mean preserving spread on appraisals, so that all appraisals are either 10% too high, or 10% are too low. Now half of the low offers will go through, none of the high offers will go through.
written by watermelonpunch, March 20, 2013 5:54
I don't know about anyone else... but that entire article screams "BUBBLE" to me.
premises for statistical inferences
written by David, March 21, 2013 8:39
Actually, Austin, the right thing to do, without prior knowledge, is to assume that the measurement (appraisal) is normally distributed: appraisals are as likely to err above as they are to err below, so a bell-shape curve is what we should see in the distribution of appraisals of a single property, if appraisals are unbiased in measurement. The buyer's offer for that property is then compared against the sample of appraisals (usually only one, sometimes two, in the sample) [NB: so the distribution of offers is not something to consider for the point Dean is making, it's a conditional probability: what is the probability that a given offer is accepted given the distribution of appraisals? It depends on the one observed appraisal]. And let's remember that offers are also appraisals, on the buyers' side, so it's unlikely that offers and seller appraisals are wholly independent of each other.
Appraisals are intentionally low
written by FoonTheElder, March 26, 2013 8:54
Low appraisals have been driven by the regulators who are busy closing the over-appraisal barn door after all of the animals have escaped.

I have gone through a low FHA appraisal a year ago where the home I purchased was appraised about 8% less than every identical home in the area.

Also, there are games being played in the contracting of appraisers where they are paid much less and are appraising in geographical areas where they have no expertise.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.