We have reviewed the four time adjustment “strategies,” as noted in the FHFA Working Paper 24-07.
Editor’s Note: Read the entire series (so far) here.
We now shift over to the response of Fannie Mae, and requirements per their Selling Guide effective February and March of 2025.
Briefly, the words are simple. “Acceptable” methods include:
- HPI (Housing Price Index),
- “Statistical,”
- “Modeling,”
- Paired sales, and
- “Other commonly accepted methods.”
Before we consider each of these “methods” individually, we must consider what is meant by each.
HPI (Housing Price Index). While there are several compiled indexes, the most prevalent at this time is the one published by the FHFA (Federal Housing Finance Agency). These are available for “all transactions” at various geographic levels: national, by state, and metropolitan areas. These may be issued monthly or quarterly, and may or may not be seasonally adjusted. They are measured as a percentage change from some start date set at 100.
Other compiled indexes are available down to smaller areas, including the Fannie Mae index which aggregates down to the county level. Most indexes are refreshed monthly, or with longer lag-time periods.
Note: The use of an HPI is unacceptable when a market-derived time adjustment indication is available!
Statistical means relating to the use of statistics. This is an extremely broad sense of an “acceptable method.” It is a discipline about collection, organization, interpretation and presentation of data.
It can mean a display of numbers in table form. It can mean random sample descriptive numbers, when used to describe a population. It can imply the “science of uncertainty.”
Most people react to the word “statistics” as meaning “random sample inferential statistics.”
Modeling is an even broader-meaning word. (We will assume the intent is about analysis modeling.) A model is a small representation of something; an abstract mathematical/logical representation to improve understanding or prediction. (Like a property value.)
Paired sales contrasts a sale/resale, or two identical property sales prices at two different times. This was discussed in Part 10 of this series.
This method is endorsed in The Appraisal of Real Estate. It does require the sale/resale to be at two different dates — coinciding with the time span needed for the appraisal comparable time span.
Other commonly accepted methods are acceptable, says the guideline. Per a dictionary, this means something is capable or worthy of being accepted. In this case it is acceptable if it is “commonly acceptable.” Hmmm.
It appears that a higher authority must be referenced here; someone or some official administrative power which decides what is acceptable and what is not. Alternatively, we will look to academic research on time-series analysis. Where would that be? We will see, later in this series!
We will look at some alternatives, including the USPAP Scope of Work Rule, and the appraisal development Standard 1.
Part 15 will consider how available HPIs might be “acceptable” for a market conditions adjustment.