Appraisals, Transaction Incentives, and Smoothing

J. OF REAL ESTATE FINANCE AND ECONOMICS, Vol. 14 No. 1

Posted: 10 Oct 1997

See all articles by Peter T. Chinloy

Peter T. Chinloy

American University - Department of Finance and Real Estate

Man Cho

Federal National Mortgage Association (Fannie Mae)

Isaac F. Megbolugbe

Federal National Mortgage Association (Fannie Mae) - Office of Housing Research

Abstract

This paper is structured around three principal objectives. The first is to determine whether any incentives for appraisals support an underlying purchase offer, which may be termed a transaction bias. Appraisals that are lower than purchase prices could involve additional cost for justification and thus undermine the transaction. The second objective is to test whether appraisal data are smoothed or exhibit less volatility than purchase data. The paper compares the volatility of separate appraisal and purchase data. given separate appraisal and purchase time series, the third objective is to derive the implied optimal appraisal updating rule. The model is applied to appraisal and purchase price indices for 3.7 million repeat transactions on mortgages bought by Fannie Mae and Freddie Mac by using monthly data from January 1975 to December 1993. The paper draws three principal conclusions. First, appraisals are systematically higher than purchase data, a first moment differential. Second, appraisal smoothing does not occur generally. Third, the appraisal updating rule for the United States appears to involve error correction whereby underappraisals from previous periods are eventually adjusted.

JEL Classification: R0

Suggested Citation

Chinloy, Peter and Cho, Man and Megbolugbe, Isaac F., Appraisals, Transaction Incentives, and Smoothing. J. OF REAL ESTATE FINANCE AND ECONOMICS, Vol. 14 No. 1. Available at SSRN: https://ssrn.com/abstract=11280

Peter Chinloy (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1951 (Phone)
202-885-1992 (Fax)

Man Cho

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-2134 (Phone)
202-752-4933 (Fax)

Isaac F. Megbolugbe

Federal National Mortgage Association (Fannie Mae) - Office of Housing Research ( email )

4000 Wisconsin Ave. NW
Washington, DC 20016
United States
202-274-5065 (Phone)
202-274-8111 (Fax)

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