We continue to explore what is acceptable to Fannie Mae for “time” adjustment. We have reviewed each of the four ‘FHFA’ time adjustment strategies. We now consider each of the five “acceptable” methods per the current Fannie Mae Selling Guide.
Editor’s Note: Access the entire series (so far) here.
(We will conclude this series with the CAA Seven Point Checklist for Market Conditions.)
The five methods include: 1) HPI (Housing Price Index); 2) “Statistical”; 3) “Modeling”; 4) Paired sales; and 5) “Other commonly accepted methods.”
In part 14 of this series, we provided a definition of each of these, and what might have been intended by this GSE. Please note that only two are actual methods. Two others are extremely broad and indefinite. The last is circular, by explaining a word with the same word: “acceptable.”
We first look at the first “method” . . .
HPI (Housing Price Index). We have several compiled indexes. Each of these focuses on a particular geographic area and property type.
Geographic areas range from the whole country, by state, by metropolitan area, by county, or even down to the census block.
Property types may include all residential, just SFRs, condos, or apartments but fail to control/moderate other parameters. They may be useful to investors, portfolio managers, and newspaper writers.
HPIs may create analytic bias as they tend to ignore compositional drift (over time) with changes in financing, concessions, and particularly in Price segments.
Some of the industry indexes (and AVM industry indexes) may drill down to a data set that is closer to the actual relevant market segment. Unfortunately, the AVM “time adjustments” are part of their proprietary black boxes.
What is important?!
Two quotes from the guidelines, each couched in a confusing double negative:
Failure to make market-derived time adjustments when indicated by market data is an example of an unacceptable appraisal practice. SEL-2024-08
Comparable sales from within the same market area (including subdivision or project) as the subject property should be used when possible, and must be used in certain instances (see below). B4-1.3-08
The Guideline goes on to consider cases of a “shortage” of truly comparable sales:
Fannie Mae does allow for the use of comparable sales located in competing market areas …
Simple. Only directly-competitive, similar properties must be used, where available. (This concurs with USPAP Standards Rule 1-4: “An appraiser must analyze such comparable sales data as are available.”)
This Guideline section continues on to say that comparables from competing neighborhoods can be used. And the appraiser must address any differences that exist, as well as discuss “how a competing neighborhood is comparable to the subject’s neighborhood.” [ A location “contrast” adjustment. ]
From the above information, and additional references within the Fannie Mae document – it is clear that the data which is closest to the specific competitive market segment (CMS) is the best, with less and less reliability and credibility as the data is less directly competitive. Duh!
Simple – HPI use is unacceptable if a market-derived adjustment is possible! 
HPI use may be “acceptable” if comparable sales are not available. Other methods can be used. Read coming blogs, or take our hands-on Data Science or Market Conditions CE class, on time-series analysis.