Data Pollution Potential to Cause Bubbles
In meetings with the National Association of Realtors and The Appraisal Foundation, there was a lot of time spent listening to AVM owners espousing their importance and more sober observations of the pitfalls. One of the presenters seemed to be bragging that 90% of the time, a good Automated Valuation Model (AVM) can be within plus/minus 10% of the actual value. Remember that Zillow’s Zestimate is within 5% of the actual value only 50% of the time. Both numbers are very dreadful and very random inconsistency across the marketplace.
But still, there is a place for their use in conjunction with appraisers, just not to the intensity being touted now, especially as their data gets polluted going forward by the impact of waivers.
Here’s a simple scenario on how data pollution works and in large scale has the potential to cause bubbles in the future – a sale’s transaction is given a waiver by a GSE and the sale happened to sell for 5% above current market conditions. That sale closes and is used by AVMs AND BY APPRAISERS as a valid comp. Multiply that by tens of thousands of transactions and we are creating unnecessary market volatility.
There was an excellent guest speaker from Columbia University, Josh Panknin who made the following observations about “big data” and the current wiz-bang “overhype” that seems to be threatening the future of appraisers.
- Computers can’t fill in the blanks
- Computers can’t do qualitative (my interpretation- i.e. views and condition despite UAD).
- Incomplete data give us incomplete answers (so throwing more data at big data does not resolve that problem).
He also used a “turkey sandwich” metaphor for AVMs.
The quality of this sandwich of bread, cheese, turkey, and mayo get better by improving the quality and components, not by moving around the items.
In other words, we don’t improve quality by simply swapping out technologies.
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What AVM company stated those numbers of 90% within +/-10% of the actual value?
I’d say one that makes up their own data claims dishonestly….but that’s a redundancy. Imagine any appraiser who was 10% WRONG 90% of the time!
A property can sell for 5% above market value with or without an appraisal. We see this frequently. The buyer simply comes up with the additional funds to bridge to gap of the sales price and what can be financed. Then that recorded sale is used by AVMs and appraisers.
Sure. Because cash contribution to cover the spread difference between price and value is the legitimate mechanism by which market values increase. Without cash contribution we may not be dealing with market increase by validated demand.
It is the frequency of over valued instances that will pick up substantially if there is no human involved to make critical calls regarding relevance of data. Interpreting listing notes, value in use, a distressed seller, a unique scenario, actually call agents for clarification, leased vs owned solar.
Agents have this habit of clicking wildly inaccurate features into their listings sometimes. The flow of polluted data will increase at a rapid pace once the person with the most propensity to clean up the data is gone, and that is the human full service long form appraiser.
JM I have a much better data pollution example complements of CoreLogic. 11602 Santa Monica Blvd., Los Angeles CA. Sold for $11,000,000 (confirmed) in 2018. Property reportedly sold again for $64,000,000+ in 2019 per CoreLogic. Actual documentary transfer fees (doc stamps) were $89,600. In the CIty of Los Angeles, that means a value of slightly above $19,911,000. Stamps were taken directly from the Grant Deed Recording.
NO market transaction can be found to match ether the $64 million+ or $19 million+ “sales”. So, even if the numbers had been correct, an AVM would be including non-open market, possible non-arms length transaction as a sale in any AVM.
Worse, since the numbers are NOT correct sale prices as reported by COreLogic, ANY AVM dependent on this transaction would be egregiously out of whack.
Doc stamps are only an indication of price paid. Escrow officers, Recording officers, developers, etc. Are frequently convinced to pay for more stamps, inflating the indicated price or to hide the extra stamps on another recorded page. verification more difficult than reading stamps. Are doc stamps paid on the extra guaranteed occupancy rents in escrow or discounted? Was a carpeting allowance accepted by the seller, or paid by the buyer? Appraisers are treated scandalously!!!
I appraised a Denver property yesterday with a finished basement, which adds significant value in the market area. Zillow comps were mostly properties without basements. My value opinion difference was 28% greater than Zillow. Another example of big data in, bad data out.