Time adjustments are not required. Unless they are needed . . .
Appraisal time adjustments are also labeled as “market conditions” adjustments. Or, more recently in Evidence Based Valuation, “Market Price Indexing (MPI)©”.
The FHFA blog post of 1/16/2024 defines “underappraisals” as those loan appraisals which come in below the contract price. The rising market time period analyzed in that post showed that traditional appraisal practice tends to “underappraise” (per the FHFA definition) during the rising markets from 2018 through 2021.
The FHFA blog states that Fannie Mae, Freddie Mac, and FHA appraisal guidelines “require time adjustments whenever market conditions have been changing.” However, they are often omitted when the property appraises above the contract price (an over-appraisal).
The Fannie Mae guidelines require the appraiser to analyze “if there have been any changes in market conditions . . . to determine whether a time adjustment is warranted.”
I find that traditional appraisal education is wholly lacking in guidance on how the appraiser is to do the analysis required. Traditional appraisal focused on picking comps and making adjustments, with no real market analysis prior to the data selection.
It makes sense that appraisers, given no methodology for price-index ‘adjustment,’ use it as the last adjustment to be made (as described in the FHFA report).
However, common sense would tell us that market investigation should come first, not last! It should be used to improve accuracy, not to fudge-factor the “acceptability” of the report to the lender.
The FHFA blog conclusion is that appraisers tend to apply time adjustments when needed to ‘hit the sale price,’ but avoid it when the ‘value’ without time adjustments is high enough to make the loan.
The blog post continues:
Time adjustments should be supported by other comparables (such as sales, contracts) whenever possible; however, in all instances the appraiser must provide an explanation for the time adjustment in the appraisal report.
Today’s data and today’s computer power with visualization tools allow for better solutions beyond just “an explanation.” Complete data, instantly available, enable a more precise, transparent, and reproducible analysis of market trends. If we let the data speak, it will give us the right result.
Market Price Indexing (MPI)©, as presented by the CAA (Community of Asset Analysts) – and as taught in the Valuemetrics.info curriculum – suggests the following procedure:
- Identify the ideal data set – the Competitive Market Segment (CMS)©;
- Present the CMS in a scatterplot, with trendlines;
- Calculate the simple regression line;
- Apply the time coefficient.
For this purpose, data selection can be subjective, reduction improved, or data-driven for an objective result (applying data science similarity algorithms). The level of data selection quality determines the risk/reliability level of the time adjustment.
This simple process dramatically enhances the accuracy, precision, and understandability of any appraisal report. It enables risk and reliability scoring.
Market Price Indexing should be applied to every appraisal for Federally Related Transactions.