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How much is that home really worth? Appraisal bias and house-price uncertainty

Author

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  • Leonard I. Nakamura

Abstract

With house prices often below the face value of mortgages these days, the expected return on many mortgages has tumbled, since one of the major forces supporting mortgages, the collateral, has weakened. One source of these mortgage problems has been the validity of the home appraisal, which is supposed to be an objective and expert dollar valuation of the house that should help make a mortgage less risky. Unfortunately, the appraisal process can go awry and often has. As Leonard Nakamura shows in this article, appraisals have been biased upward, making mortgages riskier. Now a reverse risk is at work: The bias is going the other way, causing home valuations to be underestimated, possibly making new mortgages harder to obtain. In addition to problems of bias, Nakamura discusses the appraisal process, how it's supposed to work, and how it can go awry.

Suggested Citation

  • Leonard I. Nakamura, 2010. "How much is that home really worth? Appraisal bias and house-price uncertainty," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-22.
  • Handle: RePEc:fip:fedpbr:y:2010:i:q1:p:11-22
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2010/q1/brq110_home-worth-appraisal-bias.pdf
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    References listed on IDEAS

    as
    1. Lang William W. & Nakamura Leonard I., 1993. "A Model of Redlining," Journal of Urban Economics, Elsevier, vol. 33(2), pages 223-234, March.
    2. Andrew Leventis, 2006. "Removing Appraisal Bias from a Repeat-Transactions House Price Index – A Basic Approach," FHFA Staff Working Papers 06-01, Federal Housing Finance Agency.
    3. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    4. Cho, Man & Megbolugbe, Isaac F, 1996. "An Empirical Analysis of Property Appraisal and Mortgage Redlining," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 45-55, July.
    5. Calem, Paul S, 1996. "Mortgage Credit Availability in Low- and Moderate-Income Minority Neighborhoods: Are Information Externalities Critical?," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 71-89, July.
    6. LaCour-Little, Michael & Malpezzi, Stephen, 2003. "Appraisal Quality and Residential Mortgage Default: Evidence from Alaska," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 211-233, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ozlem Akin & José Montalvo & Jaume García Villar & José-Luis Peydró & Josep Raya, 2014. "The real estate and credit bubble: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 223-243, August.
    2. Paul E. Carrillo & William M. Doerner & William D. Larson, 2018. "House Price Markups and Mortgage Defaults," FHFA Staff Working Papers 18-02, Federal Housing Finance Agency.
    3. José García-Montalvo & Josep M. Raya, 2017. "Constraints on LTV as a Macroprudential Tool: A Precautionary Tale," Working Papers 1008, Barcelona Graduate School of Economics.
    4. José Garcia Montalvo & Josep M. Raya, 2017. "Constraints on LTV as a macroprudential tool: a precautionary tale," Economics Working Papers 1592, Department of Economics and Business, Universitat Pompeu Fabra.

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