Real Estate Valuation. Art or Science, or neither?

Thirty years is enough time to change your beliefs more than once. When it comes to reasonable expectations of real estate appraisals, the pendulum swing is immune to the laws of physics. Conservative outcomes last for a while until they swing back to a more liberal result. There is no reason to expect the swing right to equal the distance of the swing left, and there is no reason to expect the pendulum to swing back when it appears to stop moving in one direction. Picking up speed in the same direction upward requires some additional force. It’s that force that’s not readily apparent.

Objectivity is a factor in arithmetic, opinion is not. Appraised valuation has room for arithmetic and subjectivity is a factor. In the run up to the collapse of the real estate industry and human crisis it caused we saw homes coming on the market at prices unheard of in high demand areas. Buyers rushed to compete with offers at these inflated prices and above. Rules of underwriting were disregarded to approve loans where the appraiser reached beyond the limits to satisfy the banker, buyer, and real estate agent. As the crisis unfolded, we expected the trend to reverse and move back to guideline compliance.

With two consecutive years of inventory shortage the trend began a slow move toward the liberal interpretation of underwriting guidelines. As of the end of last year, trend has picked up the pace and appraisals appear moving ever further from conservative practice to liberal subjectivity. Or maybe, something else is happening. The evidence is the evidence. Homes for sale at prices unsubstantiated by comparable home sales in a neighborhood received Offers at prices driven by competition, not by recent sales. I expected to see more sales derailed by low appraisals as had been the issue in recent years. That may not be happening. Either appraisals are supporting the price, and underwriting is accepting the appraisal, or buyer’s are making up the difference by increasing their down payment…and not by a little.

As we get underway in 2019 I’m going to be careful about being certain of anything related to valuation. Rules are rules and we all can read. But subjectivity and common sense are unpredictable and as long as facts can be are overridden, it’s best to be open minded to possibility.

Facts Matter

Things are better than we think according to the author of  Factfulness   Hans Rosling.

Experience and history influence our feelings, and our feelings contribute to our conclusions. Thinking about situations being better than we think as it’s applied to real estate work, two areas where we go quickly to experience and history are assessing the coming market conditions, and pricing. If Hans Rosling’s theory plays out in our business, our industry’s perspective of the coming market conditions might be less accurate, in a negative way, and our opinions of value may be a bit low when experience is given more value than facts.

What does the real estate industry tell the public every spring? Buy now because interest rates are going up. Sellers? Sell now because the market’s going to take a dip. It’s easy enough to look at the factual historical data and see if we’re right more than not (I think not).

How diligent are we at scrutinizing the facts, as they relate to appraised valuation, when answering a question of our opinion on value? The outcome of a transaction is affected by the conclusions buyers and sellers reach influenced by our opinions. How costly is it to the parties when one of us offers a value opinion based on what we think rather than what we know to be factual? Learning to make value adjustments, and then applying that exercise before speaking might be worth the effort.