Appraisals in Rapidly Changing Markets – Freddie Mac Single Family Update

A Rising Trend: Appraisals Below Contract Price

Our ongoing oversight routines reveal data that indicates the current trend in appraised values coming in below contract price has risen from an annual average of 7-9% (2013-2019) to 20% nationwide in April and May 2021. And the peak that we typically see in the late spring (generally the result of seasonal upward swings in price coupled with use of “winter sales”) has only increased in the summer months.

Our ongoing oversight routines reveal data that indicates the current trend in appraised values coming in below contract price has risen from an annual average of 7-9% (2013-2019) to 20% nationwide in April and May 2021.

Proper analysis and accurate reporting of market conditions are vital to ensuring credible property valuations. It’s important for appraisers to keep in mind that a credible opinion of market value must be based on thorough analysis of market conditions. As the Uniform Standards of Professional Appraisal Practice (USPAP) states, a credible opinion is based on relevant evidence (data) and logic (analysis).

How Can Appraisers Account for This Trend?

With closed sale transactions lagging current trends, appraisers should look at all market behavior, not just the behavior reflected by closed sales. Some additional sources of valuable information to consider include:

• General market inventory
• Trends in listing prices
• Contract-to-listing ratio (pending sales)
• Contract dates vs closed dates (market change)
• Exposure time and marketing time
• New construction patterns
• Number of available competing properties

Trends derived from such sources can provide valuable augmentation to the closed sales data.

Tracking Leading Indicators

Some leading indicators for market conditions can be found by tracking the trend of multiple offers on homes, higher percentage of contract over list price and the change in market conditions between the contract date and close date.

Developing Adjustments

Another technique that appraisers can use is the development of a market conditions adjustment or time adjustment. While our data shows a recent increase in the use of such adjustments, in some cases, appraisers appear to be very conservative – applying nominal adjustments that still significantly lag market changes.

Recognizing and adjusting for increases in any amount is perfectly acceptable, provided the appraiser has developed adequate market support using a recognized method (e.g., analysis of repeat sales, market trend analysis, etc.).

Our data also indicates a conservative trend in the overall net adjustments, suggesting appraiser behavior that is designed to not appear overly aggressive or excessive. For example, a market conditions adjustment might be offset by under-adjusting elsewhere. Recognizing and adjusting for increases in any amount is perfectly acceptable, provided the appraiser has developed adequate market support using a recognized method (e.g., analysis of repeat sales, market trend analysis, etc.).

Upward Movement of Market Conditions

It is also acceptable to reflect upward movement of market conditions in the final reconciliation of value. In a rising market, the appraiser should consider whether it is more appropriate to reconcile near the top of the indicated value range rather than at the midpoint. This is another area where our review data shows a common behavior for appraisers to typically reconcile at or near a midpoint value indication, regardless of current market trends.

What Role Can Lenders Play?

I encourage lenders to carefully review the appraisals they receive and to provide positive and consistent feedback to appraisers that reinforces the importance of an accurate market conditions analysis. It is truly the backbone of the appraisal and when developed properly results in analysis that is consistent and defendable across any level of review.

Summary

Freddie Mac recognizes that appraisers are working harder than ever now. Appraisal volume through the Uniform Collateral Data Portal^® (UCDP^®) has been at all-time high levels for over a year. If current trends hold, appraisers will continue to be busy throughout the remainder of the year and may constantly feel like they are chasing contract prices. We’re committed to continue working with appraisers, sharing data and analysis when available and messaging around all acceptable techniques at their disposal to help them do their job more effectively and efficiently.