The Federal Housing Finance Agency (FHFA) recently published a FHFA Insights blog post that cites the underutilization of appraisal time adjustments by appraisers.

The FHFA states that “[i]n principle, appraisers can consider price changes that have occurred since the time the [comparable properties used in the appraisal] sold and make adjustments known as market conditions adjustments or time adjustments. Fannie Mae, Freddie Mac, and Federal Housing Administration appraisal guidelines require such adjustments whenever market conditions have been changing.” The FHFA notes that from 2013 to 2020, the annual rate of appraisals below the contract sales price ranged from 7% to 9% of transactions, the rate spiked to 15% in 2021 and 12% in 2022 (when house prices grew rapidly), and both house price growth and underappraisal rates returned to more typical levels in early 2023.

The FHFA explains that the main dataset used for the blog post is a 5% sample of single-family housing in the Uniform Appraisal Dataset (UAD) that Fannie Mae and Freddie Mac collected covering the third quarter of 2018 through the fourth quarter of 2021. The FHFA also notes that the data includes appraisals conducted with the standard appraisal form (Fannie Mae Form 1004/Freddie Mac Form 70). As a result, the data do not include condominiums, manufactured housing, housing with two or more units, single-family investment properties, and less-than-full appraisals.

The FHFA notes that during the analysis period house prices generally rose, especially in 2021, with annual growth of 5% to 18% percent over this period. The FHFA also notes that while recent sales of comparable properties are commonly used to determine a property’s valuation, comparable sales in the analysis are typically six months old at the time of the appraisal. As a result, the FHFA states that expected time adjustments would range from approximately 2.5% to 9% percent of the sales price, on average, but that during much of the analysis period, appraisers time adjusted fewer than 10% of comparable sales. The FHFA also states that even with the rapid price increases of 2021, time adjustment frequency rose only to about 25%, and that “[w]hile adjustments are not necessarily expected in every case, these rates seem to be considerably lower than local price growth would warrant.” The FHFA also states that it appears time adjustments were unnecessary for, at most, the 36% of properties where the predicted adjustment was between -1 and 2 percent, and that “[t]his result implies that appraisers should have time adjusted 64 percent of [comparable properties], far greater than the 13 percent they actually adjusted.​”

The FHFA concludes as follows:

“This blog documents that appraisers underutilize and underestimate time adjustments, but does not attempt to determine the cause or propose potential solutions. One potential reason for underutilization is that these adjustments are some of the more analytically complex calculations appraisers might perform. Also, market information about comparable sales data can be sparse, decentralized, and observed with a lag. The data may also be costly (or at least not always free) and is not always available publicly (which may require paying for access to private databases).”

The FHFA advises that a future blog post will address some of the factors that determine when appraisers choose to time adjust, and examine whether they make time adjustments equitably across neighborhoods.