RES 450 Week 3 Assignment: Compare and Contrast Articles

Compare and Contrast Articles

RES 450

Compare and Contrast Articles

In 2008, we saw the housing bubble burst, right before our eyes. As a result of that, numerous laws and regulations have been enacted to protect the possible bias in the real estate appraisal process. I will be analyzing two articles in this essay. The first article relates to the “smoothing bias,” and its influences on the real estate market (1990). The second article is about the effects of appraisal bias with and without “client(lender)” feedback (2014, Freybote, Ziobrowski, Gallimore).

Summary of The Journal of Real Estate Research

In this article, it addresses the effects of property valuation differences between in-house and outside appraisals. The journal found that “in-house appraisal-based returns for open-end real estate funds are smoothed (Gau G.W, Ko W.,1990, p.157).” When you are “smoothing” something, you are controlling the demand to stabilize the market. The Netherlands have used this technique of smoothing in their real estate market. The Netherlands, have “two types of publicly traded real estate funds: open-end and closed-end (Gau G.W, Ko W.,1990, p.159).” Their closed-end market is equivalent to the United States REITs. In that, they are not taxed if requirements are met at the corporate level, and an anonymous transactor manages the pricing.” However, the open-end market is drastically different because “funds management firms may purchase and sell shares at their discretion.” The author’s research explains the variations amidst in-house and outsourced appraisal-based returns (The Journal of Real Estate Research, 1990). It is evident that In-house appraisal returns varied significantly over outsourced appraisals; the most obvious was between 1984-1985 when the range went from its highest peak to a massive plunge during this period. This type of smoothing bias leads to stocks engaging in an activity, which promote a “superior risk level” for companies and investors (Gau G.W, Ko W.,1990, p.167). The article discussed the issues of publicly traded real estate stocks and how it affects the valuation and share prices.

Summary of Journal of Housing Research Article

Now in this article, they compare numerous studies and the ever-changing conditions of the appraisal process that specifically came after the housing/financial crisis of 2008. The Journal of Housing Research stated that “Dodd-Frank legislation” modified the “asymmetric appraisal bias”in the past few years. The principal purpose of this article is to see if these newly enacted changes affected appraisal bias like before (Freybote, Ziobrowski, Gallimore, 2014). As stated by the authors, “Unlike anchoring-and-adjusting heuristic bias, the feedback has received limited attention in the behavioral real estate literature (Freybote, Ziobrowski, Gallimore, 2014, p.128). After the crash, researchers found that “closing the deal” was the primary driving factor. As shown in the article, “if a house valued lower than asking the price the deal may fall through. (Freybote, Ziobrowski, Gallimore, 2014, p.128).”

This eventually started affecting housing values, homes that were not worth 350,000 are now appraising at 350,000 or more to sell and get the loan originated. This lead to three types of client feedback that can be “distinguished in environmental perception feedback (lender ask appraiser to consider other comps), positive reinforcement feedback (client lets the value be what it is and sends more work), or coercive feedback (pressuring appraiser into increasing estimate by threatening less work in he/she doesn’t do so). ” When implementing these tactics, the impact on appraiser’s seemed to be “perceiving their role as price validators or as the provider of objective market value (Freybote, Ziobrowski, Gallimore, 2014, p.129).” Which eventually lead to appraiser not applying the USPAP code of ethics and standards. If you analyze the data given, you will find that low feedback will have the highest standard of deviation, higher mean, and higher median values. The appraiser’s that had no connection to the client had the most stable numbers across the board (Freybote, Ziobrowski, Gallimore, 2014, p.136).

Ethical Factors and Economic Addressed in Both Articles

In both articles, we are presented with the issues that valuation bias has on the economy. For example, in the Journal of Real Estate Research, one of the companies examined was “Rodamco,” which was an open-ended real estate fund. The study showed that when the firm announced they would stop repurchasing their shares and started free trading, the price of the stock dropped 20 percent (Gau G.W, Ko W, 1990, p.160). It appears that once private trading ended, and the public had more control over share prices, the in-house appraisal done by the company did not matter.

The overall economic/ethical concerns pointed out within the Journal of Housing Research dealt with, appraisers not upholding the USPAP standards and ethics and performing a biased appraisal, how recent legislation passed has helped stop the influence client’s feedback has on pricing, and how changes in this environment affect the process today.

Journal of Housing Research, studied the price variations in the appraisal process that were clearly related to “client feedback.” It determined that too much client input is harmful, and not enough can lead to inaccuracies even though no feedback seems to have the lowest rate of deviation. The needing to “close the deal,” resulted in economic trouble as well as bad loans destroying lives.

Here in California, I have noticed a five-year swing. Five-year boom followed by a five-year slump. When I saw the loans getting crazier and crazier by the month, I knew we were going down a dangerous path. I purchased my home for $400k In May of 2005, by December of 2007, that same home was worth $875k with no upgrades, no additions, and no improvements. That made no sense to me. I worked for Ameriquest wholesale that changed their name to Argent Mortgage; then I worked for New Century Mortgage, then BNC (Leman Brothers), and finally Countrywide. At one time or another, every one of these companies was considered the largest sub-prime lenders. Each of them had a deal; they would not do that quickly became deals they would do. They all had an appraisal review department. That went from denying a good number of appraisals to accepting ones that I even thought were sketchy — all for the love of the deal. Their investors wanted more profits, so they created ways to give it to them. If that meant pushing appraisers to “find” values where there weren’t any then so be it.

In closing, both articles addressed the bias that can be found in appraisals, which dealt with “smoothing tactics” and the other with “client feedback.” While looking at customer feedback, we see that no feedback or little interaction with the “client” provides the best and most honest appraisal. Those who had prior knowledge when dealing with particular clients also showed a more bias estimate. The research provided information regarding in-house and outsourced appraisal’s and how the price’s deviate between the two. The Dodd-Frank bill is one of the biggest contributors to bring bias evaluations to a halt, which is done through AMC and more strenuous regulations on the industry to prevent client feedback influence.