Home Price Index numbers from the AIR (Association of Interior Realtors) based on tools provided by the CREA (Canadian Realtors Association) for the month of June were just released this morning and they continue to defy some of the most common logic despite the Bank of Canada’s attempts to reign in inflation.  Interest rates have continued to increase driving payments up but the lack of overall supply in conjunction with increasing population and existing capital and equity appears to be buoying prices.  We can see the month over month increases run generally up on average about 1% to 2% for most major areas of the Interior BC regions. This goes for both single family detached and apartments. The townhouse numbers for South Okanagan and South Peace River indicate a decline but I suspect that is an anomaly in the calculations due to lack of homogeneous data for those regions. Although increases are not a given in June there is a general overall trend for increases over the spring and early summer with declines typically following in the fall and bottoming in winter, not withstanding overall significant external market influences and trends.

If you are not familiar with the HPI data provided by AIR or the CREA you can check my link here for a bit more information https://aclearappraisal.ca/2023/01/04/year-over-year-data-analysis/

I do find the HPI to be reasonably reliable but there can be some anomalies and occasionally exaggerated output that is often but not always, adjusted in subsequent updates.  For my fellow appraisers or others who utilize this data, keep a record as updates occasionally include adjustments to the prior period(s) so if you need to look back on this data you may be surprised or caught off guard. There may also be errors or other unknown anomalies in the data which they may or may not correct. Having a secondary, alternate or multiple sources of data analysis can help resolve questions that arise and give further insight where data sources such as the HPI are not yet released for the current period.

Having just completed an assignment a couple days ago where I did not yet have the current release of the June 2023 HPI data I was able to make my own reasonably supported conclusion about the market.

In the following charts I show a partial snapshot of the data used and also the data that was released from HPI today.  I had concluded on my evidence that it was probable there was a consistent trend and concluded an increase of about 1% to 2% over the prior month.

HPI (Benchmark Price) Source Association of Interior Realtors
Competitive Market Segment – July 2020, through June 26, 2023 *Source MLS sales and Aclear Data App

I put significant effort into my profession and I strive to be continuously improving my quality of work. This has pushed me to seek out alternate sources of improving my comprehension of the profession in addition to what is offered through my associations educational courses and material. Among several appraisal groups I have also joined I have found the vast knowledge and breadth of issues of American appraisers extremely eye opening. Additionally, many of the discussions I was involved in were absent any degree of the apprehension one sometimes experiences among peers competing for the same business and the willingness to share knowledge was priceless. One of the most beneficial connections was George Dell and the Community of Asset Analysts.

As a follower of George Dell since 2019 and a member of the CAA (Community of Asset Analysts) based in the Sand Diego area with members across the USA and a growing Canadian contingent, I have been exposed to influential and highly credible appraisers. These appraisers have provided insight into the power of data analysis and graphical reporting even at the highest level of demand for court and expert witness testimony. Since early 2020 through George Dell and the CAA I have been introduced to the concept of Evidence Based Evaluation.  A part of this process is based on the traditional standards of Real Estate Appraisal or the Appraisal Standards but there is a growing call for higher standards based on the rapidly evolving access to data and technology.

In Canada there are presently two primary appraisal associations, the AIC (Appraisal Institute of Canada) and CNAREA (Canadian National Association of Real Estate Appraisers) which provide accreditation programs that are widely accepted by government institutions and major lenders. Each of those bodies have standards that members must comply with.  The standards known as USPAP and CUSPAP have the same intentions, which is to provide a basis for members to follow to remain compliant as well as for members of the general public to understand what is and what is not expected of an appraiser. For the most part, both of these standards have one common goal which is to preserve the public trust and one of the other fundamental backbones of these standards is the concept(s) of The Reasonable Appraiser or the Normal Course of Business for an appraiser. 

One of most contentious issues appraisers must address is the perception of bias.  Bias can come in many forms and a search of the term “appraisal bias” will undoubtedly bring up racially or ethnically discriminatory bias as the top results, understandably as that is a serious issue.  Socioeconomic bias can arise when an appraiser’s personal beliefs or biases regarding socioeconomic factors, such as race, ethnicity, or income level, consciously or unconsciously influence their appraisal. This bias can lead to unfair treatment and contribute to discriminatory practices.

 In addition, there are other forms of bias to be concerned about and among the more common issues are Confirmation Bias. This bias occurs when an appraiser focuses on information that confirms their preconceived ideas or initial opinions about a property’s value, disregarding contradictory data.  This may become an issue when choosing what ranges of data an appraiser may limit their search, with price being the most significant concern. While limiting a search by price is possible, it opens an appraiser up to numerous issues particularly if using that data for any sort of market condition analysis (date of sale adjustments) and should be avoided if at all possible. You can see my recent post on that subject here. https://aclearappraisal.ca/2023/04/01/market-condition-adjustments-a-word-of-caution-on-filtering-by-price/  Similar is Anchoring Bias. Anchoring bias involves relying too heavily on an initial piece of information or reference point when making subsequent judgments. In real estate appraisal, this bias can occur when an appraiser fixates on a particular sales price or valuation, which may influence their assessment of the subject property.

Availability Bias. This bias arises when an appraiser’s judgments are influenced by readily available information that comes to mind or is already at hand. For example, if recent comparable sales data is more accessible or prominent, it might disproportionately impact the appraiser’s valuation.  This may also be the case when an appraiser already has data loaded into their database and they may choose not to include a search of more current or relevant information in an effort to reduce time and expenses.

Geographic Bias. Geographic bias can occur when an appraiser’s familiarity or lack of knowledge about a specific location leads to inaccuracies in property valuations. This bias can result in overvaluing or undervaluing properties based on the appraiser’s limited understanding of the local market. 

Client Bias. Client bias may be present when an appraiser’s relationship with the client or their financial interests affect the appraisal process. This bias can arise when an appraiser feels pressure to deliver a specific value that aligns with the client’s objectives, potentially compromising the objectivity or appropriate scope of work for the appraisal.  This can also play out where an appraiser is concerned that if they do not “hit the number(s)” often enough or complete assignments quickly enough they may be cut off a lender or client list.

Both associations and their respective standards and most appraisers agree that recognizing and mitigating biases is crucial to ensure fair and accurate property valuations. It is promoted that professional appraisers are trained to identify and minimize bias through standardized methodologies and ethical guidelines but what does that mean and what does all this have to do with my initial post on local price statistics. 

I mentioned bias, the reasonable appraiser, and data analysis because one of the most relevant methods of resolving all of these bias concerns is by presenting all of the relevant data and identifying the sources of data and how that was used by an appraiser in making adjustments or conclusions.

USPAP provides the term “When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion.”  This does not prescribe any specific steps or limitations.  It does not specifically state all of the data or a sample of the data. The CUSPAP is a little more specific “describe and analyze all data relevant to the Assignment” and “analyze such comparable data as are available to indicate a reasonable value conclusion.” but this is again conditioned by “the Reasonable Appraiser test”. An appraiser and intended users must, therefore, rely on the “reasonable appraiser test” or “normal course of business” but those are not spelled out anywhere. So, what is appropriate? For obvious reasons this would be impossible to set a standard that would be suitable for an entire continent of appraisers because, in some cases all of the available data could mean one sale, in others it could be hundreds or thousands.

A good majority of appraisers become established and get their training by doing work for major lenders and most lenders have set the standard at three or four comparable sales being required for reporting purposes.  They do not specify how many an appraiser needs to analyze but in many reports three or four is all that are provided.  Provided that an appraiser is satisfied that three or four sales in a report is suitable for the intended use they may comply with the lender’s minimums. This would appear to have set a baseline for residential appraisals.  I have only limited experience with reviewing other appraisers reports but in my experience three to four is typical and occasionally I see six and on rare occasion nine but there was little evidence to support why they were provided.  Some appraiser software makes it very easy to click a few buttons and have a few extra comps thrown in which may or may not mean there was any additional analysis or relevance.  This may leave a question as to how the comparable sales were selected and if any adjustments were made, how were they supported?

The time and effort of providing more in-depth analysis and support for adjustments in some cases may be considered time and cost prohibitive.  Doing work for major lenders it is clear, they choose appraisers fees or quotes generally based on the quickest and cheapest and not necessarily in that order.  That does not necessarily indicate that those are not suitable or compliant appraisals but from my experience in far greater than half of the requests for such work, I have been underbid when I conclude that a particular assignment would require more in-depth analysis and attempted to quote accordingly.  I have also found that a greater portion of assignments are of a more complex nature as AVM (Automated Value Models) are taking up a greater portion of that type of work and yet the base fees required to even get a look from most major lenders or some AMC’s have not increased for years. 

The point of this post is not to call out lenders or AMC’s. They have a business model and they ultimately decide what is acceptable to them for their purposes.  Most major Lenders and their AMC agents understand their risks better than anybody and they have entire teams of professionals dedicated to analyzing those risks.

For the rest of the appraisals and their intended users this leaves a potential pitfall.  Is the quasi-standard set by that system acceptable?  How does the appraiser or the intended user know what is acceptable for the reasonable appraiser or normal course of business?

Since I began appraising nearly 10 years ago and until I took the first Stats Graphs and Data Science George Dell signature course, I had never been taught to use more than 3 or 4 and maybe 6 comps and I was not aware of other appraisers in my area of practise doing anything much different.  We would sometimes sift through hundreds of sales but aside from using our own judgement to narrow down the list to a “manageable” handful, there was little or no reproducible methodologies developed.

Over the past 3 to 5 years, I began undertaking the additional steps prescribed by George Dell and whenever possible, I began doing more in-depth analysis even if not being paid to do so or even if I thought it may be possible to do without.  This has forced enhanced skills with spreadsheets and other platforms but also to begin creating customised software to assist with this process.  The greatest benefit being able to analyze much more data and identify trends that increase confidence in the data and the overall process while at the same time creating a reproducible work product that includes evidence for what data has been systematically included or excluded. 

We are then able to share that with the intended user(s) at our discretion so they also have the confidence in the data and the report. This provides clarity for the discussions about the various forms of bias and that if there are any bias concerns they may be better addressed.  I have always believed that as an appraiser I am able to conduct myself in a manner that limits any bias.  What is different now is that I have the evidence to back that up. A client or intended user can also be confident if there were any bias or overlooked relevant data that we have the evidence available if need be, to make that distinction. The most relevant part of this is that it creates additional accountability, a significant step for the appraisal profession which has historically based its reputation on a personal opinion.

I have covered a number of topics and issues in this post and if you have questions, concerns or are interested to find out more, please reach out. We generally cover the Okanagan and Columbia Shuswap area but if you have questions about other areas let us know, we may be able to assist with finding a good fit to respond to your local issues.

Leave a Reply

Your email address will not be published. Required fields are marked *