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Contract Price Confirmation Bias: Evidence from Repeat Appraisals

Author

Listed:
  • Michael D. Eriksen

    (University of Cincinnati)

  • Hamilton B. Fout

    (Fannie Mae
    Kansas State University)

  • Mark Palim

    (Fannie Mae)

  • Eric Rosenblatt

    (Fannie Mae)

Abstract

Prior research has argued that upwardly biased appraised values of residential properties were a contributing factor of the 2008 financial crisis. Subsequent reforms have been enacted to reduce appraiser’s financial incentives to submit biased appraisals, but appraisers continue to receive the contract price of pending home sales. This knowledge may lead them to subconsciously interpret and select information to confirm the contract price exposing the economy to future crises. A novel data series of properties that were appraised twice within six months where one appraiser was uninformed of the contract price is used to test how appraisal practices differ when prices are known. Significant differences were found in the property descriptions and the selection, price adjustment, and weighting of comparable transactions for appraisers aware of the contract price. Appraisers aware of contract price were more than twice as likely to reach an appraised value at least equal to contract price; on average their valuations were 4.2%-to-8.3% higher than appraisers unaware of contract prices.

Suggested Citation

  • Michael D. Eriksen & Hamilton B. Fout & Mark Palim & Eric Rosenblatt, 2020. "Contract Price Confirmation Bias: Evidence from Repeat Appraisals," The Journal of Real Estate Finance and Economics, Springer, vol. 60(1), pages 77-98, February.
    • Handle: RePEc:kap:jrefec:v:60:y:2020:i:1:d:10.1007_s11146-019-09716-w
    DOI: 10.1007/s11146-019-09716-w
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    References listed on IDEAS

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    1. Lei Ding & Leonard Nakamura, 2016. "The Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(3), pages 658-690, July.
    2. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2015. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," Management Science, INFORMS, vol. 61(9), pages 2220-2240, September.
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    Cited by:

    1. Hamilton Fout & Nuno Mota & Eric Rosenblatt, 2022. "When Appraisers Go Low, Contracts Go Lower: The Impact of Expert Opinions on Transaction Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 451-491, October.
    2. Paul Calem & Jeanna Kenney & Lauren Lambie‐Hanson & Leonard Nakamura, 2021. "Appraising home purchase appraisals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S1), pages 134-168, March.
    3. Mathieu Aubry & Roman Kräussl & Gustavo Manso & Christophe Spaenjers, 2023. "Biased Auctioneers," Journal of Finance, American Finance Association, vol. 78(2), pages 795-833, April.
    4. Yanling G. Mayer & Frank E. Nothaft, 2022. "Appraisal overvaluation: Evidence of price adjustment bias in sales Comparisons," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 862-881, September.
    5. Samuel Kruger & Gonzalo Maturana, 2021. "Collateral Misreporting in the Residential Mortgage-Backed Security Market," Management Science, INFORMS, vol. 67(5), pages 2729-2750, May.

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