Advertisement

Appraisals, Transaction Incentives, and Smoothing

  • Peter Chinloy
  • Man Cho
  • Isaac F. Megbolugbe
Article

Abstract

This article 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 article 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 estimation procedure uses generalized autoregressive conditioned heteroskedastic (GARCH) analysis to take account of persistence in means and volatility in the house price time series. The article 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 pervious periods are eventually adjusted.

appraisal smoothing appraisal bias house priceindices house price volatility 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Bollerslev, T. “Generalized Autoregressive Conditional Heteroskedasticity,” Journal of Econometrics 31 (1986), 307–327.Google Scholar
  2. Belsley, D. A., D. Kuh, and R. E. Welsch. Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. New York: John Wiley & Sons, 1980.Google Scholar
  3. Case, K. E., and R. J. Shiller. “The Efficiency of the Market for Single-Family Homes,” American Economic Review 79 (1989), 125–137.Google Scholar
  4. Chan, K. C., P. H. Hendershott, and A. B. Sanders. “Risk and Return on Real Estate: Evidence from Equity REITs,” Journal of the American Real Estate and Urban Economics Association 18 (1990), 431–452.Google Scholar
  5. Chen, N.-F., R. Roll, and S. A. Ross. “Economic Forces and the Stock Market: Testing the APT and Alternative Asset Pricing Theories,” Journal of Business 59 (1986), 383–403.Google Scholar
  6. Engle, R. F. “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation,” Econometrica 50 (1982), 987–1008.Google Scholar
  7. Engle, R. F., and C. Granger. “Co-Integration and Error Correction: Representation, Estimation, and Testing,” Econometrica 55 (1987), 251–276.Google Scholar
  8. Engle, R. F, and V C. Ng. “Measuring and Testing the Impact of News on Volatility,” Journal of Finance 48 (1993), 1749–1778.Google Scholar
  9. Geltner, D. “Temporal Aggregation in Real Estate Return Indices,” Journal of the American Real Estate and Urban Economics Association 21 (1993), 141–166.Google Scholar
  10. Glosten, L. R., R. Jagannathan, and D. E. Runkle. “On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks,” Journal of Finance 58 (1993), 1779–1801.Google Scholar
  11. Kennedy, Peter. A Guide to Econometrics. Cambridge, MA: MIT Press, 1985.Google Scholar
  12. Lekkas, V., J. M. Quigley, and R. Van Order. “Loan Loss Severity and Optimal Mortgage Default,” Journal of the American Real Estate and Urban Economics Association 21 (1993), 353–372.Google Scholar
  13. Nelson, D. “Conditional Heteroskedasticity in Asset Returns: A New Approach,” Econometrica 59 (1992), 347–370.Google Scholar
  14. Quan, D., and J. Quigley. “Price Formation and the Appraisal Function in Real Estate Markets,” Journal of Real Estate Finance and Economics 4 (1991), 127–146.Google Scholar
  15. Ross, S. A., and R. Zisler. “Risk and Return in Real Estate,” Journal of Real Estate Finance and Economics 4 (1991), 175–190.Google Scholar
  16. Shiller, R. J. “Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures,” Journal of Finance 48 (1993), 911–931Google Scholar
  17. Stephens, W., Y Li, J. Abraham, V. Lekkas, C. Calhoun, and T. Kimner. “Conventional Mortgage Home Price Index,” Journal of Housing Research 6 (1995), 389–418.Google Scholar

Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

  • Peter Chinloy
    • 1
  • Man Cho
    • 2
  • Isaac F. Megbolugbe
    • 2
  1. 1.American UniversityWashington
  2. 2.Fannie MaeWashington, DC

Personalised recommendations