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

Listed author(s):
  • Leonard I. Nakamura

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.

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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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Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

Volume (Year): (2010)
Issue (Month): Q1 ()
Pages: 11-22

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Handle: RePEc:fip:fedpbr:y:2010:i:q1:p:11-22
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  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," 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.
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