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Information losses in home purchase appraisals

Author

Listed:
  • Paul S. Calem
  • Lauren Lambie-Hanson
  • Leonard I. Nakamura

Abstract

Home appraisals are produced for millions of residential mortgage transactions each year, but appraisals are rarely below the transaction price. We exploit a unique data set to show that the mortgage application process creates an incentive to substitute the transaction price for the true appraised value when the latter is lower. We relate the frequency of information loss (appraisals set equal to transaction price) to market conditions and other factors that plausibly determine the degree of distortion. Information loss in appraisals may increase the procyclicality of housing booms and busts.

Suggested Citation

  • Paul S. Calem & Lauren Lambie-Hanson & Leonard I. Nakamura, 2015. "Information losses in home purchase appraisals," Working Papers 15-11, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:15-11
    as

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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2015/wp15-11.pdf
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    References listed on IDEAS

    as
    1. Lei Ding & Leonard Nakamura, 2016. "The Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(3), pages 658-690, July.
    2. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
    3. Blackburn, McKinley & Vermilyea, Todd, 2007. "The role of information externalities and scale economies in home mortgage lending decisions," Journal of Urban Economics, Elsevier, vol. 61(1), pages 71-85, January.
    4. Ling, David C. & Wachter, Susan M., 1998. "Information Externalities and Home Mortgage Underwriting," Journal of Urban Economics, Elsevier, vol. 44(3), pages 317-332, November.
    5. 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.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Hamilton Fout & Nuno Mota & Eric Rosenblatt, 2022. "When Appraisers Go Low, Contracts Go Lower: The Impact of Expert Opinions on Transaction Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 451-491, October.
    2. Lei Ding & Leonard Nakamura, 2016. "The Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(3), pages 658-690, July.
    3. Agarwal, Sumit & Ambrose, Brent W. & Yao, Vincent W., 2020. "Can regulation de-bias appraisers?," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    4. James Conklin & N. Edward Coulson & Moussa Diop & Thao Le, 2020. "Competition and Appraisal Inflation," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 1-38, June.
    5. Andrew R. Sanderford & Dustin C. Read & Weibin Xu & Kevin J. Boyle, 2017. "Obtaining Differentiation Premiums in the Presence of Fee Regulation in the Residential Real Estate Appraisal Industry," Housing Policy Debate, Taylor & Francis Journals, vol. 27(5), pages 698-711, September.
    6. James Conklin & Moussa Diop & Mingming Qiu, 2022. "Religion and Mortgage Misrepresentation," Journal of Business Ethics, Springer, vol. 179(1), pages 273-295, August.
    7. Eriksen, Michael D. & Fout, Hamilton B. & Palim, Mark & Rosenblatt, Eric, 2019. "The influence of contract prices and relationships on appraisal bias," Journal of Urban Economics, Elsevier, vol. 111(C), pages 132-143.
    8. Cem Demiroglu & Christopher James, 2018. "Indicators of Collateral Misreporting," Management Science, INFORMS, vol. 64(4), pages 1747-1760, April.

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    More about this item

    Keywords

    Information; Mortgage; Regulation; Appraisal;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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