Market conditions, time adjustments. The fourth “strategy” noted in the FHFA Working Paper 24-07, we call the “Time Out” strategy.
Editor’s Note: Read the entire series HERE.
Simply put, the appraiser avoids the issue cleanly, by just ignoring the ‘box’ where the time adjustment should go. Easy. The FHFA report states: “The most common method is not making any time adjustment, implicitly assuming that no price growth has occurred.”
The excuses (explanations) are also easy.
- Use recent sales, so no adjustment is necessary.
- Not enough data to estimate any trend.
- The “market” is too irregular.
- No explanation given.
There is an underlying logical fallacy attached to the “no adjustment” philosophy. It is called “the fallacy of insufficient reason.” It follows the “Principle of Indifference.” The conclusion of a zero adjustment, or a level market segment, is always wrong but always “feels close enough.”
It is also a “safe” assumption. The cell on the 1004 form for house appraisals has not required an entry. Most cells for other adjustments also are not required, and can be left blank.
I once had a new but experienced appraiser come to work for my office. I reviewed one of his appraisals. It had literally no adjustments. I asked, “How could this be?” He answered confidently: “A reviewer can challenge any adjustment as being wrong, with no support for the judgment of ‘wrongness.’” And if there is no adjustment, it also supports the feeling that this is “a great comp — so similar it requires no adjustment!”
It follows then that the reviewer’s job is made easier by the same reasoning, which helps “prove” that the loan made has good credibility from the collateral risk side. And everybody is happy. Happy.
How about enforcement?
Fannie Mae seller guidelines note that an appraiser must provide a market conditions adjustment “when necessary.” This conveniently avoids the issue: How do you know that an adjustment is not necessary (impliedly zero), without analyzing the market? Freddie Mac did require a time adjustment prior to 2025. So why was this not enforced?
Lenders fail to enforce upon appraisers. The GSEs fail to enforce upon lenders. Yet appraisers are required under USPAP “Acceptable Scope of Work” to meet users’ expectations.
The FHFA Working Paper 24-07 does note:
- The failure of market analysis in appraisals;
- Its relation to racial bias issues; and,
- The lack of relevant education!
Appraisal IS market analysis. Yet the “most common strategy” is to avoid market analysis!
Today we have the data. We have the computer power. We have the ability to optimize the power of human judgment, models, and computer algorithms.
The several technical, regulatory, and behavioral influences have all combined to make deals, make commissions, make bonuses, and personal wealth. A set of embedded influences all create an upward pressure on prices. The result is gains for some people, and erasing the “American Dream” – home ownership, for others.
* The FHFA Working Paper 24-07 appears to be no longer available on the FHFA website, perhaps censored as the research findings may conflict with current political objectives.
* Market Analysis and Time Adjustment has been a fundamental focus feature of the Stats, Graphs, and Data Science 1 curriculum since September 10, 2006.