Appraising Home Purchase Appraisals

Abstract

Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price. We argue that institutional features of home mortgage lending cause much of the information in appraisals to be lost: some 30 percent of recent appraisals are exactly at the home price (with less than 10 percent below it). We lay out a novel, basic theoretical framework to explain how lenders' and appraisers' incentives lead to information loss in appraisals (that is, appraisals set equal to the contract price). Such information loss is more common at loan-to-value boundaries where mortgage insurance rates increase and appears to be associated with a higher incidence of mortgage default, after controlling for pertinent borrower and loan-level characteristics. Appraisals do, in some cases, improve default risk measurement, but they are less informative than automated valuation models. An important benefit of appraisals reported below the contract price is that they help borrowers renegotiate prices with sellers.

Appraisal Accuracy and Automated Valuation Models in Rural Areas

“…We find a similar result using appraisal data for Fannie Mae and Freddie Mac acquisitions from 2012 through 2016. 1 Cho and Megbolugbe (1996), Horne andRosenblatt (1996), andCalem et al (2017) find that between 90 to 95% of appraisals come in at or above contract price. See Yiu et al (2006) for a detailed review of the literature.…”

“…Given observed appraisal bias, several researchers have considered including automated property value estimates as an alternate, and potentially unbiased, measure of the underlying value of the collateral when calculating credit risk (LaCour-Little and Malpezzi 2003;Kelly 2007;Agarwal et al 2015;and Calem et al 2017). We explore a similar question, but concentrate our attention on rural areas.…”

Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom

“…praisal inflation took place and may have played a role in inflating home prices (Ben-David, 2011;Agarwal, Ambrose, and Yao, 2019;Shi and Zhang, 2015;Ding and Nakamura, 2016;Calem, Lambie-Hanson, and Nakamura, 2017;Conklin, Coulson, Diop, and Le, 2019;Kruger and Maturana, 2020), among others). Moreover, research has shown that appraisal inflation is more prevalent for mortgages to financially constrained borrowers (Agarwal, Ben-David, and Yao, 2015).…”