Appraisers Are Historians
It is gratifying when appraisers are correct, and the AVMs burn; unless you invested in their stocks.
I mean no disrespect to the modelers of the Automated Valuation Models (AVMs) or to Zillow for relying on their AVMs. As an appraiser since the 80s, I have yet to find a computer that can tell me if I want vanilla or chocolate ice cream. Does the buyer want more acres, or less grass to cut? I will admit that a raised ranch, a two story farm house, a colonial, a split level, and a Dutch colonial can all sell for the same price. Unless they don’t. Then I have to figure out why. It’s not a mean thing, or an average thing. With 36 years of real estate appraisal experience, I say the bottom line, it’s a gut thing. Also referred to as a qualitative appraisal, that I have to explain so that the AVM underwriter approves it for lending purposes, or explain to the IRS for estate purposes, or to a jury or the judge in a tax appeal.
It is gratifying when appraisers are correct, and the AVMs burn; unless you invested in their stocks. Back in 2021, WUSA9 reported that Zillow lost millions in the home buying market. What took Zillow Ibuying down? They relied on their AVMs and “did not see the market start to cool”. Their AVM did not see the market start to cool and they did not use the expertise of appraisers. Zillow let down their investors for a significant loss of market value.
“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.”
In other words, DelPrete said the pandemic housing market sent home values through the roof. Zillow and other iBuyers bought along with it.
But then, in the summer of 2021, the market started to slow down. However, Zillow Offers according to DelPrete didn’t slow down with the market.
Appraisers are independent individuals who train themselves to recognize the market value of a particular property. We appraisers are the buyer and the seller, we track the motivations of the moment. We are historians trying to recognize the changing markets.
On April 1, 2020, we were watching closings take place for contracts written before COVID. Maryland was on lockdown. I called an agent and asked what was going on in the market. He said “instead of showing my buyer 10 houses over a week, I showed 2, and they picked one because they did not want to go into any more houses. The seller said yes to the offer because they were not sure if there would be anymore buyers until the pandemic was over.” This was repeated by many, and we were off to the races, ending up with 4 times the number of sales above a typical year. At first, prices were stable but then by August prices increased as the inventory dried up. The computer models would not know about this hot housing market until several months after the August settlements, and even then, what was the real price? And what was the value? Homes were being bid up, with multiple offers above the asking price. By spring 2021, there was no inventory, we had 1,800 sales in the prior 12 months, and 22 houses on the market. There were offers on coming soon listings, before they hit the market and before they were inspected, some without any conditions. And then all of a sudden agents were telling me that the buyers were balking at the prices. I remember this happened in Y2K. The market stopped, and there were no buyers for 3 years. But Fannie Mae thinks they can create an AVM to project a safe investment for a bank. Good luck with that.
I do feel sorry for the buyers who moved to the country, the land of pleasant living, only to find out later there is nowhere to purchase a latte, the restaurants close at 9 or earlier, and the nearest grocery store is a 30-minute drive. Some of our comers are trying to sell and move back to the city but the interest rate is much higher. Can the AVM adjust for this? Appraisers follow these changes in real time with real people in their markets.
I have a copy of an article from 1987 warning that the computers will be the end of appraisers. At the time my secretary would type both side of the 1004 form in 15 minutes on her Selectric typewriter. When I would find an error, since no white-outs were allowed on the form, she would type it again. In the early nineties I added digital photos, which was better than polaroid and a lot more convenient than going to a photo lab and getting 3 copies of each picture. I hated sending the pages of the appraisal report on my single page fax machine. Thank heaven for Gmail. When the AVM can tell me whether I want a beer, wine or a mixed drink, then perhaps I will begin to believe it can think like appraisers and value a property correctly.
By Fitzhugh Turner, Certified General Appraiser and owner of Tidewater Properties Appraisers in Maryland.
I think opendoor not only used avms but also desktops through AMCs to buy properties.
They have taken some huge hits because they relied on big data/AVMs/algorithms. If only they had hired appraisers. Let’s hope they stay out of business.
Should have gotten some real appraisals!
This is no different than the market collapse in 2007-2011, when appraisers were stating that they market was in balance and prices were stable. Billions were lost, not millions.
I reviewed hundreds of appraisals & review appraisals and re-appraisals & reviews of reviews from that era.
Many loans became first-payment defaults. Appraisals were 20% to 100% or more excessive.
The AMC reviews of the original excessive appraisals, usually involving an out of State reviewer, found nothing wrong with those egregious appraisals.
From this fiasco came Dodd-Frank & dominance of AMCs. And 1004mc to force appraisers to statistically measure & report market trends (it’s a terrible format, but at least got appraisers to do something)
Appraisers don’t forecast and don’t save lenders from market downturns.
History tells us that there will be many appraisals marked “in- balance” and “prices stable” during the current (or soon to come) market downturn, whereas reliable AVMs will be able identify & measure the decline, in many markets.
Says the guy who “co-developed an Automated Valuation Model or AVM for Veros Software.” Biased much?
Are you saying that because you reviewed hundreds of bad appraisals & review appraisals, that it was the appraisers fault for the market collapse in 2007-2008? Based on hundreds of bad appraisals, all appraisers were at fault for billions lost?
With friends like you, who needs enemies!
“History tells us that there will be many appraisals marked “in- balance” and “prices stable” during the current (or soon to come) market downturn, whereas reliable AVMs will be able identify & measure the decline, in many markets.”
I think you believe that when appraisals are marked “in balance” and “prices stable” it is referring to at least a regional market and at most a national market. The residential appraiser is analyzing a neighborhood for the subject property and it may or may not be in balance and prices may or may not be stable but this is not for what you might read in the paper in reference to the national economy.
In addition to that Rick, over a years time, you may have increasing values and decreasing values reported in the report at the same time. Meaning long term (year over year) prices may have increased, but over the short term (- 90 days), values may have declined and negative time adjustments are warranted. With an explanation, the neighborhood section could be correctly indicated as increasing, while a different explanation should be provided for negative time adjustments. On a side note, I completed a report last week (a one bedroom house, 1,500 sf lot, 110 years old, etc.), where I had to use a comp that was nearly two years old. I had increasing months, stable months, declining months and in the end a positive time adjustment was warranted. Funny enough, all of my other comps had negative time adjustments.
Seek the truth.
AVMs will be able to reliably measure the downturn, because, you know, nothing is as reliable as extending a linear function into the unknowable future.
What an odd response to the article! Were you involved in Zillow Offers by chance? Zillow lost about $350M with the most sophisticated AVMs that money could buy.
There was a time when lenders disqualified many loan programs if the appraiser indicated that property values were declining. Blame the appraisers if it makes you feel better! I think you protest a little too much.
Just where did all the AVM’S GLEAN THEIR INFORMATION FROM IN THE FIRST PLACE? DATA MINING. You reviewed 100’s of appraisals? All in line with USPAP Standard Rule-#3? Expert in all markets? Because your an AMC reviewer? I wonder about the competency rule… that you didn’t adhered to. The 1004MC “forced appraisers to do something”? When the market is going up over a period of YEARS it’s rather easy to support increased values. But if as you say, “reliable AVM’S will be able to measure the decline in many markets, then they lost billions by not verifying “faulty appraisals that you data mined to begin with”. Then there were all the predatory lenders who made billions before the appraisers could no longer support a 576 sqft one story for $420,000. They panicked about values. We won’t talk about the nonexistent arm twisting that lender ABC, XYZ and 123 brought to bare upon appraisers. If you don’t get me this value, I’ll find someone who will!!!! Nah that didn’t happen either. 40 year mortgages, stated income, double zero down on and on that went. GSE oversight? NOPE. Easy to blame appraisers. Just remember, when you point a finger at someone, there are three more pointing back at you from your own hand.
Well said jaydee!
You cant replace a human appraiser. AVMs are misleading.
Great article! Love it.
Yea, anyone whoes been on this roller coaster ride for any period of time sees it coming way before anyone else does. I’m sure you were telling friends when they were touting a great market the telltale signs had already raised its head. Just not going to get that algorithm from a computer. Good enough for them.
Been hearing of computer takeover since the 80s. Every time they get their beer muscles up and get cocky…. The market collapses and sends them back to the Stone Age. It’s like clockwork. This time is going to be the worst across real estate and many sectors.
Just the other day we entered several addresses which were 200k short on the avm indicator compared to others immediately next to them. Interestingly these appeared to be long term owner properties. Something about not having a recent sale or refi indicator can cause misleading avm results where that very old sale somehow anchors value estimates much below the current market. Sounds suspiciously like some of the abuses of lenders from the past, having incentives to drive long term owners out of properties for financial benefit. Surely the we buy houses for cash people are not complaining about this known avm systems flaw.
The concept of validating avm’s in general is rooted in this concept of everyone should be able to know their homes worth nearly instantly, so they can likewise access new credit and loans so swiftly. Often referred to in lending as the velocity of lending, something annoying appraisers often slow down. They can issue credit checks, review employment, form approvals, nearly instantaneously, get a life changing substantial sized loan to someone in a mere day. So what gives with the value consideration delay when people try to leverage their real properties and it takes an appraiser weeks to issue a signed insured report?
People should be careful what they wish for, these automation advents would turn the entire American housing market into a commercial speculation haven, ran like wall street. In fact it already has.
https://thenationalrealestatepost.com/ibuyers-eating-salted-crow/
Excellent, always like watching those guys. Sadly though, even though at the upper levels the avm companies realize the ibuyer approach may have been a mistake, so many of the destructive tools to arise from those approaches remain. The property managers, amc’s, and many individual lenders are still leveraging the tools they were sold, continuing to push remote inspections, hybrid service reports, avm based waivers, etc, etc. These big corps only protect themselves, leaving all the mess and risk for regular people to clean up. Funny how the message about caution and the big tech programs not working well are lost in translation, as the TAF and their partner amc groups continue to push for avm’s, continue to promote hybrid reports, continue to restrict the appraisers ability to provide legitimate full service appraisal services. Restraint of trade is the name of the game to push these harmful new programs out to consumers right now. Big bad evil racist appraisers are at the heart of it, we are the groups stopping this great new avm tech from being more readily accessible to consumers. Funny again how the slander to push these programs through still sticks, even though the programs themselves have already fallen flat in record time. Tried another manager solicitation the other day, trying to push pace pro remote hybrid inspection deals; ‘multiple people working on value reports at the same time’. The concept is asinine.
The market flows and ebbs on many basis’s: Financial wherein the lender need to secure monies in R.E., for guaranteed returns, or in higher returns based construction monies, or on agriculture based on short terms. You get it!
These flows are measurable from the MLS’s closing dates v offering dates. When these two figures are sorted, they represent stuff, which can be interpreted and verified as meaningful or not. Did it close in 45 days or in ten months?
Can’t the appraiser recognize that using two-year-old sales comp’s have meaning and be part of the value conclusion?
Agents, buyers, sellers and Lenders all have differing opinions.
That would certainly make sense since the “appraisal profession” was H-I-S-T-O-R-Y long long ago.