Are Appraisals Missing by 5 to 10 Percent?

Written by: Steve Cook   Thu, September 20, 2012 Beyond Today's News, Crisis Watch, Housing Crisis

In homogenous markets today, market uncertainty creates a range of prices for homes as great as plus or minus 5 percent and in less stable neighborhoods, appraisals can range from as much as plus or minus 10 percent unless appraisers apply risk management techniques to come up with values that improve pull through ratios and better protect homeowners and investors, a leading valuation firm said last week.

In a white paper published on its web site, Pro Teck Valuation Services’ advocates the use of more sophisticated risk-based appraisals to improve accuracy by taking advantage of the amount of market data and analytics available while better protecting homeowners and investors.

Appraisal quality has become a national issue, with implications for the housing recovery. “There are many challenges currently facing the appraisal industry, and we see appraisals as one of the most crucial and overlooked aspects of the recovery of the real estate market,” Frank Gregoire, a state-certified residential appraiser and president of Gregoire & Gregoire, Inc. testified before the House Financial Services Subcommittee on Insurance, Housing and Community Involvement in June. Developing and reporting property values more accurately is critical to improving market performance, reducing risk and strengthening the housing finance system, he said.

Factors ranging from tastes and preferences, overlooked variables such as higher quality windows, inaccurate public information due to unreported home improvements, urgency to buy or sell; distress sales, financing, seasonality, and thin markets can create a range of possible values at any given time.

A second area that improves appraisals is the Market Condition Addendum (form 1004MC), required by Fannie Mae and Freddie Mac. The addendum supports market trends and conditions for the subject’s neighborhood. It requires an analysis of inventory as well as trends in median sale price, list price, days on market (DOM), Sale-to-List price ratio, and impact of foreclosures and REO’s. The appraiser needs to perform a statistical analysis to determine if each of these market indicators is representative of a declining, stable or increasing overall trend in neighborhood property values, and then draw a market conclusion.

“Developing the most accurate and supported market condition conclusions can be aided with analytical tools developed to assist the appraiser in analyzing a potentially large set of market data. Advanced statistical calculations only a modeler can perform can provide the user of the appraisal with a higher level of confidence,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “Appraisals based on incomplete data or faulty trend information may lead to wrong conclusion that can negatively impact a loan when an increasing market is misreported as stable or decreasing and vice versa.”

Collateral Analytics, a partner in Home Value Forecast, has developed automated analytics that can be used by the appraiser to provide a more consistent, accurate and robust neighborhood analysis.

“Perhaps it is time to provide a confidence band range in addition to the appraiser’s point value. Add to this a more statistically robust market condition conclusion and we can shed light on the relative riskiness of a particular estimate,” said Dr. Michael Sklarz, President of Collateral Analytics. “Such improved risk-based underwriting will better protect both homeowners and investors.”


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