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Consumer home loan valuations serve those who pay the bill – the lender.  This cost is passed on to the buyer, and the buyer usually has a right to get a ‘copy’ of the report.  However, the valuation is not there to help the buyer decide whether the price is fair or a good investment.  It is not there to help the consumer buyer decide on a purchase.  It comes too late!  The valuation does not help the home buyer be well informed as is required for the federal definition of value.

Our government-mandated definition of “market value” assumes that the homebuyer is well advised.  It appears that today consumers are less well-advised than before.  Why?

First, there is an explosion of use of free consumer-facing “automated valuation models.”

Second, the pandemic reduces buyers’ home visits and personal contact with real estate agents.  (Sellers also want fewer unmasked looky-loos in their homes.)

Third, lender reliance on the automated models has continued to increase.  AVMs (Automated Valuation Models) are not appraisals.  An AVM does not perform an inspection of the house.  An AVM does not know the interior condition, additions, code violations, hazardous contamination, and termites, as well as any positives, like new plumbing, electrical, or kitchen remodel.

So, what’s the problem?  Each of the above increases the variation of reported “value.”  Of course, there are disclaimers of value, using substitute terms such as ‘estimate’ or other proprietary label.  These are not appraisals.  No.

So, what do we know about any tests of reliability?

Each vendor, each AVM, provides a different number, or range of numbers.  Most often this label of uncertainty is called an FSD (forecast standard deviation).  Each AVM product provides this.  Unfortunately, this FSD (or “confidence score” calculation) is also a secret.  A proprietary secret.

Can we say the consumer is “well informed or well advised” in a home purchase decision?  It appears not.

So what is the problem?  AVMs (and appraisers) must value to the going market price value, as set by buyers who are not well informed nor well advised.  AVMs (as well as appraisers) set their ‘estimate’ or ‘opinion’ by this price level, which can be inflated.  In the past, the ‘market’ ignoring the critical parts of the very definition of market value has caused inflated market prices, which then become the official “market value.”

Several solutions have been proposed.  A quick list:

  • AVMs and appraisals may need to focus on actual competitive markets, rather than larger areas or anecdotal ‘comp’ sales.
  • Value based on fundamental relationships of all goods and services, in place of comp prices.
  • Forecasting of value risk into the near future, say 90 days, one year, or three years.
  • A rigorous adherence to the very definition of market value that we already have.

The loan industry and the valuation function are allegedly for the ‘public good.’  Is today’s home consumer somehow not part of the public trust . . . ?