Market Value in the Age of Big Data Infallibility
This isn’t a topic I generally spend a lot of time on. Partly because I am ‘uneducated’ (sans college degree) and partly because it bores people to death. Despite this I ask you to bear with me.
It all started while I was listening to my favorite local radio stock market gurus on the way to wash my car. An expert from the firm of Dewey Fleecem & Howe (DF&H), or some such firm, was explaining the current stock market instability in a historical context.
Since our inception as a nation, DF&H reports that we have had 45 (or was it 48?) recessions. On average once every five to five and a half years. Let’s double check: 45 x 5 = 225 yrs; 2016-1776 = 240; okay close enough. Any nominal difference gets charged to unreconciled accounts receivables anyway. Okay, the last part was unfair.
Since World War Two, DF&H reports that we have had forty (40) significant stock market corrections anticipating recessions or triggered by fear of recession. Of those, only 20 were proven to be correct.
In other words, half the time when ‘The market’ significantly corrected itself, it didn’t know what the hell it was doing. Let’s double check: 20 x 5 = 100; or 20 x 5.5 = 110. 2016 – 1945 = 71 years; okay after all, we ARE talking about Wall Street accountants and financial experts.
The market is far less than perfect…
Aside from math, the above would make the highest priced accounting and legal firms blush with envy. The expert from DF&H was really pointing out that “The Market” is far less than perfect, OR orderly. Yet that is what ‘it’s’ definition of Fair Value or Fair Market Value (FMV) is predicated on.
Think about it. Historical accuracy of only 50%! Even AVMs usually do better than that.
I have to confess. My mind was racing far ahead of the host’s presentation at this point. I couldn’t resist asking myself WHY EVERY SINGLE PRESIDENT SINCE Bush 41, (even before?), selected Treasury Secretary’s from Wall Street? Specifically Goldman and Sachs part of Wall Street?
Never fear Michael! DF&H was about to make all things clear…sort of.
You see, Wall Street is itself a Leading Indicator of the economy. “Say what!?”
That’s right. A leading indicator not as in a popular indicator, but as opposed to Coincident Indicators and Lagging Indicators. (Darn I wish I had me one of them degree thingies about this point!)
I understand English, but what the heck are they talking about? Thank goodness he was communicating for the benefit of the great masses and explained it so that even I could understand it.
Take construction. The pulling of permits is a leading indicator. It means housing starts are expected to increase in the future. Hence it’s a leading indicator. Housing starts themselves are houses currently being built, or a Coincident Indicator. And lastly, new home sales are something that is past, or you guessed it, a Lagging Indicator.
Okay, I think I am beginning to understand. Wall Street is in the fortune telling business (or misfortune telling business for some).
This explains, partly at least, why accountants will ‘value’ something based on the return that it is supposed to get, rather than the return it DOES get. According to Wall Street, a ‘market rent’ is not a rent that is actually being received or even probable in a given market. It is a rent that is necessary in order to provide the rate of return that is “required” by the investor.
By now real estate appraisers are either pulling their hair out, or like my old appraiser buddies at Treasury/IRS/LB&I, are calling it The Blue Smoke and Chicken Bones Approach to valuation.
In 1801 or even 1860, the London Exchange did not move as fast as today. News, and profits, travelled by ship or caravan. Investors had time to rationally consider risks and potential returns. They did not say “I demand a 13.735% ROI”. But instead asked “Am I likely to make a profit worth the risk?” You see they weren’t hindered by “Big Data” back then, or required to make ‘informed decisions’ in nano-seconds. THEY were still allowed to rely on common sense and prudent judgement. It wasn’t until the late 1800’s to 1920’s that high speed information, (ticker tape), created a requirement to make decisions based on little or no information, more rapidly.
Value, as a concept still meant something.
After World War Two, the earth shrunk and information travelled at the speed of sound. Decisions had to be made much quicker, though still not in nano seconds. Executives DID have time to consider decisions. “Value” as a defined concept still held.
Somewhere along the way accounting professionals called ‘Economists’ realized that they had an abysmal record for accuracy. So they created new economic theories: “accounting principles”, discounts, control premiums, magical algebraic formulae’s, and of course unpredictable variables, to explain why they were always 20/20 in hindsight, but less than 50/100 in foresight.
Now they can PROVE that a 49% undivided fractional interest is only worth 24.5% of the whole, (for tax purposes). OR that if coupled with just 1.00001% more interest it could be worth 75% more or less of the whole, (for buy out of controlling interests).
Unless of course someone like IRS challenges the findings, in which case the “value” is renegotiated.
What a concept! If real estate appraisers were allowed to renegotiate our appraised values AFTER loans go bad, we’d NEVER get in trouble with regulators!
Concurrent with the above, modern technology created a ‘need’ for logic based, sound business decisions to be made and executed faster than a human could articulate them. Trading algorithms based on the economists brilliant historical record of accuracy & the infallibility of Big Data were created so that hundreds of millions of dollars in any flavor asset could be instantly traded as soon as specific market triggers were identified by their software. “Practically” foolproof!
Now they want to bring the same expertise to real estate appraisal, which they have already demeaned by renaming it ‘valuation’.
This software trading market is considered to be an orderly and informed market operated in the best interests of its principals.
THIS is the market in which the International Valuation Standards Council (IVSC) and The Appraisal Foundation (TAF) expect us to adopt THEIR standards of value for real estate appraisal!
They ignore that our subject’s market value is a lagging indicator, or at best a coincident indicator.
For those that don’t find this quite as exciting as I do, it might be a good idea to join the American Guild of Appraisers (AGA) and at least know that someone is watching out for you, or trying to. Contact Jan Bellas for more information at (301) 220-4100 or Mike Ford at (714) 366 9404.
For those others that just can’t get enough, check this link and this one. These last two links are best read while listening to the strains of “Kumbaya My Lord, Kumbaya” quietly playing in the background.
- The New & Improved Fannie Mae “FRAUDULATOR 2.0” - May 15, 2023
- The Scam of Racial Discrimination by Appraisers - May 10, 2023
- What Is My Incentive? - September 20, 2022
Last two links relate to the Glass-Steagall Act which had a big bearing on prudent regulations that were abandoned circa 1999. It only took 8 years after that for the complete collapse of the real estate market!
Bill Clinton’s signing of Dodd-Frank repealed those crucial provisions of the Glass-Steagall Act, and Bill Clinton so loved Jimmy Carter’s CRA(community reinvestment act), that he gave it a fine polish before signing off as president. Obama and ACORN played a significant role in 2007-2008 housing collapse by putting undue pressure on banks to make high-risk loans, but we’ll save that for another discussion (who inherited what mess?…come again).
Under educated, not “uneducated” Mike…and I would argue that point. From reading your posts and articles I can only say that you blow my most recent attorney out of the water with regard to your reasoning and ability to construct a sound argument. To better illustrate my point I might point out that my attorney with 7 years of higher education is currently being sued by me for incompetence.
We do have one thing in common Mike. I walked away from school with a 120+ college hours under my belt towards a double major in History & Political Science. Why so close to the finish line? I lost my Air Force ROTC pilot slot and saw no reason in continuing on with what I viewed as a pointless waste of my time. In the end I found that appraising was a far more satisfactory career for me. My buddies (competitors) all ended up flying bombers and cargo planes. God forbid, I likely would have ended up in the same drudgery for seven years.
Appraising is (was) a career specially made for individuals who refuse to take orders because they understand early on that most bosses are idiots. Unfortunately, this common personality flaw (independent streak) is also responsible for the destruction of the profession from within.
Thanks RA, but I point out the non degree aspect for a reason. I’m no longer bashful about it. Over my life I have proven to my own satisfaction what I am and what I am capable of. I also know that there are so many others out there either ‘like me’ or so far superior THEY embarrass me. My best friend (dyslexic-& non degreed) was one of the best contract ‘analysts’ I ever met. In the mid 1980’s he and I had to research a city’s waterfront master leases and sub leases dating back to the mid 1960’s. The “lease” consisted of two three foot stacks of loose papers. By the time we were finished the City had to rewrite its entire General Plan, as well as make a few other minor concessions to “open government”. But that’s another story. I digress.
Don’t sell bombers short! Lt.Col. Charley Kay (active USAF or USAAC circa late 1940’s – mid 1970’s) His peers always claimed he was one of the first to do a barrel roll in a Canberra Bomber-apparently it was highly frowned upon, so he may also have been the last. (Brother in Law of the equally infamous Lt. Col. Donald G. Page (ret) who according to his son; and a book by a frowned upon French Authoress, used to shoot VC weapons smuggling elephants out the window of his FAC spotter plane. Whole damn family was a little crazy around the edges, but FUN!
Anyway, degrees used to mean far more than they do today. I still have high regard for engineers; doctors, nurses, City Planners, & scientists (aside from those with social engineering agendas).
“Unfortunately, this common personality flaw (independent streak) is also responsible for the destruction of the profession from within”…tends to make trying to get us to do ANYTHING united, like herding cats.
Such concepts are currently illustrated in the dealings with XML focused underwriters. They don’t understand logic, and approach all UCDP XML related warnings as hard stops which demand revision. XML is the new nightmare in this industry. Scrap the UCDP program before it’s too late, I say. When the underwriters don’t even read the reports to which they demand revisions, there is obviously a problem. Like if I wanted to hire a painter, I’d be sure to hire a blind painter. That is a similar approach to lenders using XML exclusively to review reports, they’re running in the blind.
The entire intent of MISMO, UCDP, AIR and XML & “EI,EI,EIO” is to assist in the commoditization of appraisal reports data so that the unregulated banks can provide only summarized sections of an appraisal for the securities folks to sell to their unsuspecting clients! Read the FNMA Lender notices that come out each week and its easy to see where THEY are going.
WHY we allow a failed GSE to set policy for virtually ALL residential appraisal in America is beyond me.
I suspect the NEXT step will be for borrowers and buyers to hire their own separate second appraisals AFTER the transactions are done in order to sue for renegotiation or rescission! Oh, wait THAT is already happening.
Last week I quoted $1,500 to $2,500 (minimum $1,500 base plus expert witness fees of $350 and hour) for what I believe was only a $750 original appraisal involving a purported $1,000,000 income property. The buyer found out AFTER COE that it was NOT a legal 5 units of 2 Brs each, but rather a legal FOUR or five unit of 1 BRs each! Allegation is $400,000 over payment based on fraud and a bad appraisal. Lots of details still missing. Point is that it was an underpaid, AMC ordered low fee appraiser that was susceptible to being conned by the seller.
This week I tried to pick up some fresh asset management work. That’s always hit and miss, and this time it was definitely a miss. $325 full appraisal order. Special assignment notes; This property is in litigation, please meet (foreigner name) at this time at the property. So I google this guys name and he apparently makes a living suing the county of Denver, over and over again, various departments, etc. LOLROFLROFLROFL. That’s appraisal distribution these days. They’ll send an active litigation related appraisal sourced from an ambulance chaser, to a random appraiser who does not deal with litigation, without even looking into any details. The assignment company has such an incredibly limited scope, the lenders routinely give them entirely too much credit. The mantra of the amc is that appraisers are expendable, and the rules are negotiable. The amc is just there for the cash.
Humor aside, THAT summarizes ALL AMC orders these days. They absolutely do NOT analyze the assignment complexity OR the appraisers qualifications needed OR assure the fee is either customary OR reasonable.
$325 for litigation? I don’t think so. IF it is really non complex, then maybe $750 PLUS confirmation of EW fees at $350 an hour for entire time I am at court, PLUS travel time at $75 an hour. Usually I think $1,500 minimum for litigation (unless I really need to generate income; OR its an interesting assignment-then THAT would be complex and command a higher base anyway).
Its not that lenders give them (AMCs) too much credit; its that lenders simply do not care, and consider themselves to be insulated. ASC on the other hand says that in their eyes and the eyes of all federal regulators there is “virtually no air between the lender and the AMC.”
State coalitions should start keeping track of this with specific cases and documents (since AMC laws are different in each state). Its something I’m going to suggest to the AGA down the road for all 50 states + 5 other jurisdictions. A State by state file of all AMC alleged violations.
Too long of a read. Get to your point!