The Price of Big Data Valuation Fiasco

Price of this Fiasco May be the Downfall of the US Real Estate Market"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.

Hamp Thomas
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Image credit flickr - kikodoze
Hamp Thomas

Hamp Thomas

Hamp Thomas, founder and president of the Institute of Housing Technologies. He is also the president of Carolina Appraisers & Real Estate. Leading expert on residential square footage and its influence on the home valuation process. Instructor, Appraiser, Realtor and Author. He is the author of “How to Measure a House” based on the ANSI® Guideline; the American Measurement Standard, Death of an Industry-Real Estate Appraisal, etc. & offers continuing education courses (for agents and appraisers), and numerous other real estate courses, webinars, and YouTube videos.

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16 Responses

  1. Rick Henry on Facebook Rick Henry on Facebook says:

    Watched a portion of Nova yesterday. The episode was titled “Prediction by the Numbers”. Talks about how some succeed and others fail. Who should or should not get a home loan was briefly mentioned as something the Black Box predicts and should people really have faith in the system.

  2. Avatar Advocate says:

    Excellent article. I could not agree more! Thanks

  3. Avatar Tim says:

    You might as well be talking to a wall… Big banks are not listening nor do they care. Why should they? The taxpayers will bail them out, again and again, they have no choice and when these crooks get the bailouts again, they will just keep it for themselves. WAKE UP POLITICIANS

  4. Avatar John Pratt says:

    This week I completed an appraisal in which I calculated the sq ft of the home at 2,696 sq ft. Public records show 2,510 sq ft. I went back to the property and check my measurements again to verify my info. I proceeded to the county assessor’s office to check their records and sure enough they had a (recent) sketch of the home with the dimensions. Their sketch looked similar to mine with only minor differences in some exterior dimensions. The county’s sketch came from a Real Estate agent and Loan Officer which had applied for a permit to rehab the home for them to flip the property which they had recently purchased. I notice that the wall between the living area and the garage did not match with my drawing, so back to the home to measure the width of the garage (again) and the exact location of that wall. Sure enough their drawing was incorrect by 6 ft x 31 ft (depth of the garage) = 186 sq ft. and the county had changed their records to reflect the incorrect drawing they had from this R E agent and Loan Officer. If the home is valued at $ 200/sq ft x 186 = $ 37,200 that the value is off. And now the mortgage industry wants “desktop Appraisals” where the R. E. agent or god knows who, to inspect the property and the appraiser is supposed to accept that info as factual and value the property. Assessor’s record in this county are not reliable for support of the improvements. I said this before and I will say it again, they only want the appraisers Signature, Title and E & O Insurance

    • Perfect example John. Much respect for the repetitive trips back into the field to double check your own work first, and then taking the time to understand the discrepancy.. 10 sf no big deal. 100 sf? Maybe. Depends on price per sf in your market. 186 sf? Absolutely! Nicely done.

    • Avatar Bill Johnson says:

      What about when builders give options instead of the common in my area default tandem 3 car garage layout. Public records will often never reflect a buyers choice to make the 3rd garage a bedroom, which by default turns the 1/2 bath into a full bath. Public records are in error on the bed count, bath count, garage count, and the GLA. During the sell off after the crisis (short sale / REO), when agents or the banks simply pulled public records for their property characteristics, these properties often sold for $50,000 less than they should have based on other parties lack of policy, concern, or skillset. Considering its the American tax payer who is the financial backstop to such liabilities, who cares if the bank bailout was bigger than it should have been.

  5. Avatar Pam E. says:

    Now might be a good time to go to Congress about this and force Fannie and Freddie to share subject Property Data with all licensed and certified appraisers in this country. They know it’s the best data available it far exceeds MLS and tax data in terms of accuracy. Zack Dawson and Mel Watts need to get their heads out of their asses and get out of the big Bankers and AMC beds and work with independent fee appraisers, not against them!

  6. Avatar Hooligan says:

    Spot on Hamp! I encourage all appraisers to take your on line Home Measurement specialist course and obtain the HMS certification!!

  7. Baggins Baggins says:

    Hamp Thomas, the voice of reason, nice article. The landscape of lending in general has shifted substantially. Hundreds of thousands shuttered community lending locations, more to come. Lenders don’t need customers, they profit on borrowed money more than they get from consumers of debt and savings instruments. The call to audit the fed will never go away. That’s what the PTG guys always talk about on the radio, and I believe them. I use no outsourced services or assistants, rarely copy any language, and provide unique reporting always. This is the valuation department, not some easy money corporate and tech cheerleader camp. Twist, twist again, and goldilochs? They buried QE in housing for so long, the jig is up.  The reason this never clears up is because there is no sound money basis and therefore consistently illogical relationships to price vs value based on individual terms. Cheers. Let’s see, who said it best, can you guess?  If you know me you guessed correctly. Paul: A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.

    • Baggins Baggins says:

      Wait, that’s the news page. This is the listen to podcast link. My favorite drive time financial hour, man I’ve learned so much from these guys over the years. One thing is for certain, these dudes are almost always right and are clearly very well informed. Click the date link for pop up player. If appraisal falls out I’m definitely getting into chicken nugget farming.

  8. Outstanding analysis Hamp. Even if NAR started enforcing accurately and consistent methods of reports living area SF in all mls data there would still be those builders of new product, and their tight leash trained agents that will continue to promote non permitted “other” areas as living area.

    That skews the hell out of any price per sf of living area analysis.

    Even appraisers are sometimes caught up in the hype and puffery where visually apparent “third stories” in cities with two story limits are being counted as living area. Even though they are not on permits as living area; or shown in total certificate of occupancy or even on the architects plans as living area / habitable area.

    Trained appraisers are capable of wading through the quagmire of deliberate deception. Big Data isn’t.

    Anyone think being off by (more than) several thousand sf of living area on a multi million dollar property won’t eventually get noticed?

    Banks don’t seem to care about that. They just want to be able to say they “saved” $50 to $150 per appraisal times 1,000,000 transactions. Even if those paltry savings result in HUNDREDS of BILLIONS in overstated collateral value; and or value-affecting adverse site conditions that Big Data ‘missed’.

    I’m solidly with Hamp on this one. I’m not relying on Corelogic to do my job…anymore than I’m going to co sign appraisals performed in India, or ClearVal “appraisals”.

    • Baggins Baggins says:

      Some of the poorly aligned data seems intentional. Anyone else find zillow and Corelogic Realist systems approach of stating combined gla, both agla and basement, as a singular lead sizing figure to be difficult to work with? This hits me when I look at rentals, I have to run manual county research to sort it all out because these systems may not return appropriately separated agla vs bas figures. Look, bigger houses, that’s why they cost more. Regular consumers must be having a hard time making better informed decisions with this combined approach. So now that it’s so complicated, I need the avm? Special realty agent trick, simply price it at the peak of the Realist avm. Made their jobs easier and created a self perpetuating cycle which confirms the validity of the avm. Just ignore all this housing price inflation, then it all ties up nicely. Relationships of foreign investors buying up American housing at a record pace and their affiliations with monopolistic data companies? Coincidence?

      • It changes the buyers perceptions. Agent markets house at ONLY $200 per sf of living area. When they include basements or unpermitted in law quarters or ADUs the apparent price per sf of ‘living area’ becomes $150 -$175.

        I bet most consumers like basements or other utilitarian areas. They may even be willing to pay a HIGHER price per sf of the base GLA for these nicer ancillary features (say $210 per sf or $220+-) but they should never be mislead into thinking these are permitted living areas by corelogic or anyone else.


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The Price of Big Data Valuation Fiasco

by Hamp Thomas time to read: 4 min