The Price of Big Data Valuation Fiasco
"Price" of this Fiasco may be the Downfall of the American Real Estate Market…
I Choose Not to Be Part of the Big Data Valuation Revolution
The big data and automated valuation explosion will ultimately destroy the real estate industry and it will take decades for it to recover. The facts are, we live and work in a price-per-square-foot industry. The square footage data used in the so-called “official record” in local tax records is in error enough to alter home values and it’s an equal opportunity offender – values can be too low or too high. And, it’s wrong enough to dramatically change home values, ranging anywhere from as low at 10% to as much as 60% (and even more in some cases). That margin of error is just too high to ignore. Until someone comes up with a way to improve this square footage information, the one number that serves as the currency of real estate, all the big data in the world will never price real estate fairly or consistently. It may work in 10-20% of markets across the country, but in every other market the valuations can be a joke. Ask local bank managers about the quality of online real estate valuations. Ask appraisers. It’s no secret. However, the local people dealing with consumers don’t have to deal with stockholders and corporate boards, who are only concerned with raising profits. This massive online valuation push has nothing to do with improvements in technology, it only has to do with timing. Big Banks see this as their best opportunity to force feed the idea of better, faster, and cheaper valuations at a time when appraisal problems have been in the news.
This is not even a new discussion, even though many would like you to believe it is. They will argue we have all these great new data tools at our disposal we didn’t have even ten years ago. And, armed with this new data and technology, home valuations are easier and more credible than ever. That’s simply not true. The entire appraisal industry assault that started with the HVCC is all about the money. It’s nothing more than the Golden Rule at work. The banks have all the money and are doing a great job convincing Fannie Mae and Freddie Mac that online valuations are the way of the future. They argue they will do a better job and do it cheaper. Even if they allow appraisers to only work on the comparable selection and valuation process, they would have real estate agents or anyone else but an appraiser perform the onsite home inspection. If you take away the inspection process from the appraiser, you place an untrained person in charge of one of the most important parts of the process. Computer valuation or untrained inspection with limited appraiser participation, I argue the whole program is nothing more than smoke and mirrors and the ultimate loser will be the American home buyer, and the mortgage investor who relies on these unreliable systems.
This is not rocket science. For all their specialized mathematics, the most weight in each valuation comes down to price-per-square-foot, using inaccurate square footage details. When the largest part of the valuation process comes down to only two numbers – the sales price and the square footage – and one of those numbers is wrong (the square footage) – then every value created using this formula will also be wrong. It’s not that complicated. I say show us your formulas used to create these “better” values, but no one wants to share. Behind the scenes, we hear it again and again, it still comes down to the price-per-square-foot in the vast majority of residential valuations.
Write this down. If online valuations replace living, thinking appraisers, the results will be an onslaught of unreliable mortgage loans based on a faulty data system. Home buyers will think they have a 10% equity situation only to learn they actually have two or three. Or, a mortgage loan for $250,000 will discover the house is actually worth $210,000 when they decide to sell. Who will pick up the tab? Not the big banks that knew all this going in. It will be the taxpayers who will pay the price, twice.
It will be the taxpayers who will pay the price, twice.
The evidence is easy to see with just a little investigation. Appraisers, find ten home sales that went through the MLS where you did the appraisal and compare their online valuations (and their tax valuations). Get ten of your peers to try that in ten different markets. Two patterns emerge. First, the square footage numbers in the appraisals are different from those in tax records (and likely MLS); and second, the values don’t come close to matching. There is over and under pricing with percentage errors all over the place. Don’t trust my theory? Try it for yourself.
Real estate appraisers need more training to make their reports better and they do need to learn more about the latest tools at their disposal. They also need to do more research and analysis than ever, not less. Appraisers are charged with protecting people’s single, largest, lifetime investment, and the place they will call home. And yes, the price of an appraisal might even go up a little. Consumers never complained about appraisal prices, only banks who wanted the money for themselves by using automated valuations they control. Think anyone is clamouring for doctors to lower their fees? How about new car prices — is anyone working hard to lower car prices? People want quality care and products and the price is the price. However, the "price" of this fiasco may be the downfall of the American real estate market.