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Smoothing in Commercial Property Valuations: Evidence from Individual Appraisals

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  • Jim Clayton
  • David Geltner
  • Stanley W. Hamilton
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    Abstract

    We explore the causes and extent of appraisal smoothing, defined as a temporal lag bias in appraisals, by analyzing how appraisers use the transaction price data available to them. We test the empirical validity of the partial adjustment model that underlies the traditional "unsmoothing" of benchmark return indexes. We reject the no-lag null hypothesis and find that the extent of bias-inducing behavior appears to vary over time in the manner suggested by rational appraisal behavior as the quantity and quality of contemporaneous transaction information changes. We find evidence that appraisers valuing the same property in consecutive periods anchor onto their previous appraised values, resulting in more lagging than first-time appraisals. An implied policy prescription is for investment managers to rotate appraisers so as not to allow the same appraisal firm to consecutively value the same property. Copyright 2001 by the American Real Estate and Urban Ecopnomics Assocaition.

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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 29 (2001)
    Issue (Month): 3 ()
    Pages: 337-360

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    Handle: RePEc:bla:reesec:v:29:y:2001:i:3:p:337-360

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    Cited by:
    1. Robert Edelstein & Daniel Quan, 2006. "How Does Appraisal Smoothing Bias Real Estate Returns Measurement?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 41-60, February.
    2. Drouhin, Pierre-Arnaud, 2012. "Caractéristiques statistiques et dynamique de prix des produits dérivés immobiliers," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10918 edited by Batsch, Laurent.
    3. Shaun A. Bond & Soosung Hwang & Gianluca Marcato, 2006. "An Analysis of Commercial Real Estate Returns: Is there a Smoothing Puzzle?," Real Estate & Planning Working Papers rep-wp2006-17, Henley Business School, Reading University.
    4. Yun W. Park & Doo Won Bang, 2013. "Valuation of Brokers over Real Estate Cycles: Korean Evidence," International Real Estate Review, Asian Real Estate Society, vol. 16(2), pages 166-188.
    5. Kevin Chiang, 2009. "Discovering REIT Price Discovery: A New Data Setting," The Journal of Real Estate Finance and Economics, Springer, vol. 39(1), pages 74-91, July.

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