Time adjustments were often performed after other adjustments, particularly in upward trending markets, according to the December 2024 FHFA Working Paper.
Editor’s Note: Read the entire series (so far) here.
Some appraisers were avoiding time adjustments, unless needed for another purpose! That purpose is when the appraiser couldn’t match the user-lender’s expectation of value (an “underappraisal”). In these cases, appraisers defer the upward time adjustment, in order to meet “user expectation” as required in USPAP (Uniform Standards of Professional Appraisal Practice).
This method violates the “sequence of adjustments” set out in appraisal texts and licensing education. Market conditions analysis must always come prior to individual comparable differences. Similarly, it contradicts best practices of Evidence Based Valuation (EBV)©. But it is a convenient, albeit murky way to “get through the system” and help a GSE lender “make the deal.” USPAP sets out the order of appraisal development in Standard 1-1. It presents market analysis (SR1-3) – prior to the applied “approach to value” (SR 1-4). Market first, comps second.
Once we know market analysis comes first, we can identify the optimal strategy considering these goals:
- GSE “acceptability” (meets user expectation, as per USPAP);
- Commonly found appraisal methods (as per the FHFA paper);
- Understandability (usefulness) to lending users and borrowers;
- Technical correctness and accuracy, providing reproducible results;
- Strength in different circumstances, particularly sparse data markets;
We have seen that “acceptability,” as published, is elusive, overly broad, and comprises only two methods which may provide some actual result (right or wrong): Paired sales, and HPI (aggregated published indexes). We have found that paired sales is wishful thinking in terms of multiple match-up of sales dates. Paired sales is clumsy to depict visually, and difficult to understand and explain.
The grouped sales method has:
- The same weakness (as paired-sales) of timespan match-up;
- The impossibility of bracketing the effective appraisal date, and;
- The poor accuracy, (or even wrong direction) as per Simpson’s paradox.
Grouped sales is also clumsy to depict visually, and even harder to explain – particularly the end-point (effective date) bias which tends to exaggerate any calculated trend-slope.
HPI trends seldom, if ever, reflect the subject’s specific market segment. But . . .
Sometimes, you just don’t have enough data.
Sometimes, the typical rules of similarity just are not there. You need at least 7-8 data points to do a genuine time-series analysis. You can expand more widely in location, or further back in time – and still not have enough. In such cases, the HPI method is the only method.
There is a valid, defensible strategy when you have to use HPI. The goal is to match the subject features and location as closely as possible, out of the several HPIs that are publicly available.
Time-series analysis, once set up, is easy to execute. It’s accurate, visual, and insightful.
The next issue of this time-series series will summarize the ideal strategy of the proper application of time series analysis. This includes the specific issues and judgment (decision-points) needed for proper application and reporting.
Finally, we provide access to: the open-source software, the brief code chunk, and instructions.