Appraisal Time Adjustments Are Underused

Appraisers ignoring time adjustments for local house price growth are affecting valuations

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Appraisal Time Adjustments Are Underused

Senior Economist

Home purchases can be complicated by an appraisal below the buyer’s contract price offer. For the sale to go through, the buyer typically must renegotiate the purchase price, put more cash down, or accept costlier loan terms.

From 2013–2020, the annual appraisals rate below the contract price ranged from 7 to 9% of transactions. Underappraisal spiked to 15% in 2021 and 12% in 2022, when house prices grew rapidly. Both house price growth and underappraisal rates returned to more typical levels in early 2023.

Much of this variation occurs because appraisers base valuations on recent sales of comparable properties, which can become outdated quickly during periods of rapid price changes. Low appraisals can also impact refinance borrowers by leading to less attractive loan terms, limiting borrowing amounts, or resulting in canceled transactions.

In principle, appraisers can consider price changes that have occurred since the time the comparables 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 change.

However, appraisers frequently do not make time adjustments, even when they are likely to impact the appraised value substantially. This analysis also finds that the adjustments appraisers do make are typically substantially smaller than house price indexes would suggest.

National Trends In Time Adjustment

During the analysis period, from the third quarter of 2018 through the fourth quarter of 2021, house prices generally rose, especially in 2021. National house prices grew annually from 5 to 18% over this period. For residential real estate, recent sales of comparable properties are commonly used to determine a property’s valuation. Because comparable sales in this analysis are typically six months old at the time of the appraisal, expected time adjustments would range from approximately 2.5% to 9% of the sales price, on average.

However, time adjustments are not very common. During much of the analysis period, appraisers time adjusted fewer than 10% of comparable sales. Even during the rapid price increases of 2021, time adjustment frequency rose only to about 25%. While adjustments are not necessarily expected in every case, these rates seem to be considerably lower than local price growth would warrant, as discussed in the next section.

During much of the analysis period, appraisers time-adjusted fewer than 10% of comparable sales.

Do Appraisers Make Time Adjustments When Necessary?

When comparable sales are recent, or house price growth is slow or flat, there may be no need for a time adjustment. Thus, to determine whether time adjustments are underutilized, it is insufficient to note that adjustment rates are well below 100%. We need a benchmark that estimates how large the adjustment for each comparable should be. Here, monthly house price indexes for ZIP codes are used to walk forward the comparable sales amounts. For each comparable in the data, the price indexes are used to calculate a predicted time adjustment corresponding to the age of the comparable and local price trends.

For 20% of comparables, the predicted adjustment was less than 1 percentage point in absolute value. For another 16% of comparables, the predicted adjustment was between 1 and 2 percentage points. Appraisers time adjusted only about 5% of these properties, perhaps because these adjustments are too small to have much impact. However, making no time adjustment amounts to an assumed adjustment of zero, which is unlikely to be accurate.

In addition, a leading appraisal textbook discusses several examples featuring time adjustments close to 1% or even less.3

Thus, it appears that adjustments were unnecessary for, at most, the 36% of properties where the predicted adjustment was between -1 and 2%. This result implies that appraisers should have time-adjusted 64% of comparables, far greater than the 13% they actually adjusted. Appraisers time adjust most of the time only when the predicted adjustment is 20% or larger.

Low appraisals can impact refinance borrowers by leading to less attractive loan terms, limiting borrowing amounts, or resulting in canceled transactions.

Are Time Adjustments Accurate?

For predicted adjustments from 1 to 3%, actual time adjustments are within a few tenths of a percentage point. However, as the expected adjustment gets larger, the discrepancy grows. When the predicted adjustment is 5%, actual adjustments average 3%. At 10%, actual adjustments average 5%.

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).