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Why House Prices Beat the Pandemic Odds

…And Why So Many Housing Economists Got It Wrong by Brian Fluhr One year ago, at the onset of the Coronavirus pandemic, housing economists were making dire predictions for the market. The demise of housing did not play out the way many anticipated for several reasons but foremost because strong economic housing fundamentals were already in place pre-pandemic. These fundamentals included the durable credit of borrowers, balanced debt-to-income ratios, and reasonable loan-to-value ratios. Homeowners today can withstand the crosswinds of a temporary loss of income because many homeowners have a much healthier balance sheet than homeowners had during the Great Recession—by some estimates, $7 trillion in home equity across the country. The equity well reportedly increased by 16.2% year over year in the fourth quarter of 2020. In that estimation, the equity gain was more than $1.5 trillion. Federal policies enacted since the pandemic began helped provide additional stability. For instance, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, injected relief. This included expanded unemployment benefits, foreclosure bans, and student loan forbearance. COVID-19 hardship forbearance was extended to those hit by the pandemic, which had a federally backed mortgage. So why did so many economists predict a home price collapse as a result of the pandemic? Anxiety ensuing from the wave of job losses that followed the shutdown is in part to blame. The Jobs Impact Ordinarily, widespread job loss is associated with housing insecurity. By the fourth quarter last year, figures from the Federal Reserve Bank of St. Louis showed that despite some improvement in the economy, “heightened unemployment and economic uncertainty could continue to affect the housing market through 2020 and beyond.” The bank referenced the 2007-09 financial crisis when foreclosures and tighter lending practices locked many out of homeownership for several years. “There are signs of these long-term effects again,” they added. However, the types of jobs lost were highly concentrated among lower-to middle-income workers, heavily impacting individuals in the decimated service industry who are more likely to live in rental units. An April 2020 report from the National Bureau for Economic Research elucidates this point. It found that 37% of jobs in the U.S. can be performed entirely at home, establishing that these occupations tend to be higher paying than those that cannot be performed in a home setting. Additionally, these jobs “account for 46% of all U.S. wages.” Veros Got It Right High-profile observers of the housing economy predicted that the market would depreciate annually due to the pandemic, with forecasts of prices dropping 6.6% by the early part of 2021 in one instance and between 0.5 and 2.5% from October 2020 to July 2021 in another.  VeroFORECAST, however, predicted that the global pandemic would only have a brief impact on housing prices. After one uncertain quarter, Veros stood tall by predicting that programs and policies implemented in the wake of the Great Recession would lead the market to return to pre-pandemic levels very quickly. At the close of the fourth quarter of 2019, predictions were buoyant over what was to come in 2020. In its Q4 2019 VeroFORECAST, the company predicted an average increase of nearly 4% by the fourth quarter of 2020. This projected increase was based on data from 332 Metropolitan Statistical Areas (MSAs). At the time of its release, in early January 2020, Eric Fox, Veros’s vice president of statistical and economic modeling, cited sound economic fundamentals, low interest rates, and strong levels of employment as indicators of moderate home-price appreciation “with very few geographic pockets of weakness.” When data from the first quarter emerged in April 2020, Veros Real Estate Solutions projected that home price increases would pause for only one quarter. Home prices rebounded throughout the subsequent quarters of the year. In Q1 2020, VeroFORECAST data indicated an average projected appreciation rate increase of on average 1.9% through the first quarter of 2021. During 2020, there were two notable, competing scenarios at play. On the one hand: historically, low-interest rates stimulate demand and increased prices. On the other: rapidly rising unemployment and quickly falling GDP, both of which were turbulent but did not faze the housing market for the whole year, as others had predicted. Veros correctly indicated that there would be only a mild home price depreciation at the start of the pandemic, with a return to normal appreciation rates later in the year and into 2021. As such, in March 2020, Veros said that in the first quarter of 2020, prices would depreciate by 1.1%, then the real estate economy would recover, and by the first quarter of 2021, prices would return to pre-pandemic appreciation levels of about 1% per quarter. This forecast was in line with previous projections indicating positive average home price appreciation, despite pandemic-related economic uncertainty and unemployment, particularly in the leisure, hospitality, and tourism industries. The themes that Veros would point to early on started to take shape in subsequent quarterly reports. “This quarter’s forecast indicates significant home price appreciation from what we just experienced in the first quarter of 2020,” Fox said in early July. “Despite the devastating economic, social and health impact resulting from COVID-19, the overall average annual appreciation rate increased to 3.5% vs. 1.9% from the annual forecasted rate last quarter.” The return to house price increases presents a paradox: Despite the naysayer predictions, appreciation strengthened beyond the levels witnessed before COVID-19 curbed economic activity. One catalyst was what has been dubbed “COVID migration.” That is where those jobs that can be effectively performed at home take center stage. As soon as large tracts of the population realized that they could move their entire lives even significant distances from where they previously commuted to work, an exodus from key market areas started to occur. To be sure, the pandemic migration phenomenon is real. Places such as Boise, Idaho, and Spokane, Washington, continued to see a pattern of rising prices throughout 2020 and into 2021, while many urban centers across California saw

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Hartford, Connecticut

“New England’s Rising Star” City Could See Falling Home Prices Before 2022 by Carole VanSickle Ellis Hartford, Connecticut, is home to a lot of long-established locations, including the country’s oldest public art museum, the oldest publicly funded park, and the oldest continuously published newspaper. The city has also served as home to many historic figures, including Mark Twain, John M. Browning (inventor of the automatic pistol), and Alice Young, the first woman to be hanged for witchcraft in America. In 2021, the city is poised to add yet another “first” to its storied history; it may well be the first city in America to experience a post-COVID housing market correction. “The CoreLogic Market Risk Indicator (MRI)…predicts that metros such as Hartford, Connecticut…are at the greatest risk of a decline in home prices over the next 12 months,” reported 24/7 Wall St. in June. Readers should note the “greatest risk” is no guarantee of a crash or even a true correction; CoreLogic researchers assigned a probability of correction of less than 25 percent to Hartford and other similar markets. However, in a national market with a 2.4-month supply of housing inventory and double-digit year-over-year gains in value, any probability of a change in the temperature of a market is worth noting. “[Nationally] properties stayed on the market for 17 days in April, on average, and 88 percent of homes sold during that month were on the market for less than a month,” said Marco Santarelli, founder and CEO of Norada Real Estate Investments. “Most homes continue to sell faster, and the total number of homes available continues to be constrained.” Santarelli observed a “hot sellers’ real estate market in most areas of the country,” and added that Midwest and northeast housing markets “are the hottest and, together, make up 14 of the 20 hottest housing markets in the country according to Realtor.com.” By comparison, Redfin reported in May that Hartford homes remained on the market for an average of 61 days (just six days fewer than the same time in 2020). According to Redfin data, the median selling price in Hartford is currently about $215,000, down very slightly from April. Realtor.com researchers derived similar results, reporting that the 16 neighborhoods included in the metro area had skyrocketed in value by 30.9 percent year-over-year in May. Both sources reported limited inventory but noted that home sales in the area were climbing. Redfin reported 52 homes sold in May 2021 (vs. 46 in 2020), and Realtor.com reported 243 homes currently for sale in the area with 31 listed the last week in May alone. Edging Toward Equilibrium In light of this data, the emergence of Hartford on a list of markets most likely to experience a post-pandemic correction should be extremely interesting to real estate investors. Although Hartford, like the rest of the country, has experienced constrained inventory levels in 2021, local real estate professionals say there is a possibility that the market could begin edging back toward “equilibrium” by the end of the summer. “It is difficult to tell just how much demand exceeds supply,” admitted local agents Amy and Kyle Bergquist, who have been active in the area for more than a decade. They emphasized that investors hoping to make accurate predictions about the Hartford market should watch two indicators in particular: buyer frustration and listing pace. “We are always looking for clues about two key questions: How many buyers are getting frustrated with the market and opting out, and how will the pace of listing change?” the two explained. They noted that buyers are currently not necessarily “opting out” of the market but, instead, “settling in for a longer search.” This could help restore that equilibrium that might ultimately result in more opportunities for acquisition on the part of investors if there is no longer the same sense of urgency creating bidding wars and an auction mentality every time a property is listed. Given that more than half of the homes in Hartford sold for more than their asking price during Q1 2021, any equilibrium could be a positive sign for investors interested in fix-and-flip deals or long-term rentals. Hartford has also emerged from the pandemic as a burgeoning destination for remote workers and northeastern tourists. The city offers a vast array of attractions, including the former homes of literary giants like Mark Twain and Harriet Beecher Stowe, Wadsworth Atheneum (the oldest free, public museum in the U.S. and home to more than 50,000 works of art and “curiosity”), and parks like the Elizabeth Park Rose Garden and Bushnell Park. However, owning vacation rentals and short-term rentals in the area can be complicated, so investors should do their due diligence and work with a local expert before getting involved in this asset class (see sidebar). Hartford Investors Face Ongoing COVID Questions Like everywhere else in the United States, Hartford has been dramatically affected by the COVID-19 global pandemic and resultant health policy decisions made on state and local levels. In Hartford’s case, however, local policy will affect investing strategy in extremely tangible ways even after the CDC eviction bans and other national-level foreclosure moratoriums have ended. Hartford investors must factor two significant issues into their decisions about where to invest and what strategy to use: employment initiatives and local eviction policies. Unemployment improvement in Hartford and in Connecticut as a whole has been sluggish, with unemployment rates remaining stubbornly above the national average. According to the Connecticut Department of Labor, Hartford’s unemployment rate in April was still hovering just under 14 percent (not seasonally adjusted). Connecticut’s unemployment rate fell from 8.3 percent in January 2021 to 7.6 percent in April 2021, but still felt bleak compared to the national rate of 6.1 percent. However, Department of Labor research director Patrick Flaherty emphasized there are many factors in play that could help the city and state in the coming months. “Recoveries are uneven,” he said. “Evidence of increased job postings and openings suggest Connecticut is poised for larger [employment] gains

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More than Appraisers: Advocates and Partners for Life

Appraisal Nation’s Loyalty to Clients & the Industry Stands Out by Carole VanSickle Ellis Michael Tedesco and his partners founded Appraisal Nation in 2007, just in time for one of the worst housing corrections in history. It might sound like a terrible beginning, but Tedesco proudly notes it was the crisis that formed the cornerstone of Appraisal Nation. “We lived through one of the worst housing recessions in history, and we built the number-one private lending appraisal management company (AMC) through that,” the CEO of Appraisal Nation recalled. “It was our process to focus on the needs of small-to-mid-sized lenders, even the individual brokers, which at that time was relatively unheard of for AMCs. Unfortunately, when the market did crash, it proved extremely difficult [for anyone] to get business.” Tedesco and his partners were determined, however. Relentlessly, they went door-to-door in Raleigh, North Carolina, then expanded outward across the nation. “We made it through on persistence and a little stubbornness, introducing ourselves, and building our brand at a time when most AMCs focused only on the big banks,” Tedesco recalled. Today, Appraisal Nation works with more than 3,000 lenders around the country, boasts a nationwide panel of more than 20,000 appraisers, and completes more than 250,000 appraisals per year with some of the fastest turnaround times in the country. Appraisal Nation has also been included on the Inc. 5,000 for the past five consecutive years. Inc. editor-in-chief James Ledbetter observed of the companies included on this list, “There is no single course you can follow or investment you can take that will guarantee this kind of spectacular growth, but what they have in common is persistence and seizing opportunities.” John Tedesco, senior vice president of business development at the company, cites Appraisal Nation’s dedication to treating each client like an “anchor client” regardless of size or location as the source of said spectacular growth. “Most appraisal companies have one or two big anchor clients, but Appraisal Nation has deliberately cultivated a diverse portfolio of small- and mid-size lenders,” he explained. “This is an approach most AMCs cannot replicate because they are not built to service clients doing just a few appraisals a month. We give our clients the room to start small if that is what they need and also give them room to grow.” Many of the company’s clients have been with Appraisal Nation since the very beginning, often starting out with monthly activity as low as five or ten appraisals a month. Now, these companies have a monthly volume in the thousands. “Our clients have a loyalty to us because we helped them from the beginning. We always wanted to treat every client as if they were a Chase or a Wells Fargo regardless of size,” he said. Strength in Numbers Because Appraisal Nation has such a large volume of clients and treats each client with the same attention to detail as big banks and lenders, it is imperative that the company have a streamlined process in place for keeping the thousands of orders for appraisals in order. That is where Al Ballard, executive vice president of operations, and his team come into the picture. Ballard likes to describe his team, which consists of three primary departments, as running a relay race for each client order. A client order begins with the placement team, whose job it is to communicate with clients and appraisers to ensure that each order is assigned to an appraiser who understands what the client needs and how the assignment will work. That is the first leg of the race. “We like to get off the starting blocks clean, fast, and flawlessly,” Ballard said, noting that the placement team consists of individuals who have usually been with the company for years and are deeply familiar with client needs and different appraisers’ abilities themselves. “We pride ourselves in developing top talent and promoting from within. All of my team leads and managers began in entry-level positions within the company and earned their promotions through hard work, education, experience, and an innate willingness to go above and beyond for our clients,” Ballard said. “We have developed some who are now in executive positions. Operationally, I’m very proud of the team we have built.” Once the job and the appraiser have been connected, the client service team takes the baton for the second leg of the race. This team monitors the progress of the order, a crucial role that has always been important and has become even more vital during the COVID-19 pandemic. The client service team is in charge of keeping things running smoothly, tracking inspection dates and other appointments, keeping the client up-to-date, and making sure the order is completed and delivered by the due date. The result of this intense tracking speaks for itself: Appraisal times have lengthened dramatically during the COVID-19 pandemic, but Appraisal Nation has kept their turn-times in the single digits in almost every state. “The ‘secret’ is just streamlining the process,” explained David Roberts, senior vice president of strategic partnerships. “We are always focused on making our process more efficient for every client.” The final leg of Ballard’s relay, the quality control team, is crucial to that ongoing refinement of the appraisal process. “They deliver the report to the client and, in the process, make sure that report meets or exceeds client expectations in quality,” Ballard said. “They are the gatekeepers, and we all take a lot of pride in these professionals.” Interestingly, Ballard’s quality control team is made up of both appraisal experts and experts in other areas of real estate. This is deliberate, intended to keep client needs front and center rather than permitting an internal, industry focus to dominate the quality evaluation. Appraisal Nation believes a team of real estate professionals with a diverse range of expertise can best serve a client in terms of making sure the client’s needs are met and, when necessary, that expectations are managed appropriately. “With the ongoing pandemic and the

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Valuations in the Single Family Rental Space

Here’s What’s Happening with Rental Investments by Kevin Ortner Housing prices continue to march upwards. But what’s driving prices in the SFR space? What is responsible for this boom, and should we expect more of the same in the months ahead? As Renters Warehouse CEO, I have seen a lot of changes in the housing market over the last year. Here are a few things that stand out. There’s good news for investors who own rental property: the single-family rental property market has continued to thrive, despite the events of the last year. Nationally, 5.6 million homes were sold in 2020 –and the median cost of a home shot up 15%, increasing from $300,000 in 2019 to $340,000 by the end of 2020, according to the National Association of Realtors.  Both home values and rents alike have soared over the past year, and it is still very much a seller’s market. Demand is high, and there’s just not enough inventory to keep up.  Still, we cannot assume that home appreciation will continue at its current pace. It is safe to conclude that at some point appreciation will start to level off and growth begin to slow. At some point, we could start to see home value appreciation that is a lot more modest, rather than the extreme increases that we have seen over the last few months. If this holds true, then you will want to keep in mind that you are paying for future appreciation today. It may be a slow housing price appreciation climb over the next 18-24 months. No one knows exactly when appreciation will begin to slow down, so investors should not assume that the next month will be the same as the last.  There are a number of factors that are at play, all of which are impacting housing prices. Here is a look at some of the things that we have noticed in recent months. A Housing Shortage Currently, there is a shortage of housing inventory. In fact, the U.S. housing market is short 3.8 million homes according to recent data from Freddie Mac.  While builders have started to increase output in the past year, up 18% from 2019, lumber shortages have made home construction considerably more expensive. A global lumber shortage caused by lower production in 2019 is one contributing factor. The soaring cost of lumber could easily add $24,000 to the cost of a new house.  And it is not just lumber that is on the rise, other costs are increasing as well, including labor. Labor costs, largely due to worker scarcity, have increased more than expected during the first quarter of the year. New Homes Cost More to Build Many builders have been telling us that we are starting to hit the affordability ceiling, with buyers and builders starting to max out. When this happens, it could put pressure on prices to slow.  Builders are building what can be sold. Values in almost all tiers of housing have risen, with housing prices increasing in most markets. In 99% of metro areas tracked by the National Association of Realtors, prices in the first quarter of 2021 increased over the same period last year.  Of course, these price increases are pushing out the first-time buyer. This is leading to an increased demand for rentals as more people opt to rent rather than buy.  For investors, there is still opportunity in affordable rental homes. There are a great number of renters who have lost their jobs or are still on extended furlough. With the hospitality and service sectors being especially hard hit and many places closing their doors for good, there are a great number of jobs that are at risk. While there will be opportunities for new jobs in many places as things slowly ease back to normal, we still have a way to go. These workers will still need accommodation, and affordable rentals will continue to be in demand. The Institution-alization of the SFR Space While SFR has long been an asset class that has been dominated by small investors, for a few years now we have been seeing this space slowly start to tilt toward the institutional investor. There are a few reasons for this. For one thing, institutional investors have the money to secure the best deals for themselves. They can buy materials at-scale and for a better deal than small scale investors, helping to mitigate costs. Large and medium builders are buying up the small guys, or, in some cases just pushing them out. They can lock in lumber prices with a longer timeline than the small builder. This allows them to have a bigger market share and control the pricing as well. Some are building more homes and making a bigger profit. Then there are the impact fees—the cost of doing business, and low rates that give institutional investors an edge. Institutional debt is almost always free. This, of course, is helping to drive prices even higher.  Additional factors are compounding to make SFR more challenging for the everyday investor. Eviction moratoriums have provided protection for tenants who cannot pay the rent, but often at the expense of landlords—forbearance for landlords is spotty. In many areas, it is also becoming increasingly difficult to manage a rental home, due to local legislation and changing laws. Landlords today need to continually keep on top of things to ensure that they are in compliance. These days, it is just not that cost effective to manage one or two properties.  Institutional investors, though, have cheap debt and the processes in place that allows them to buy and manage homes at scale, making these investments far more profitable –and feasible. We are seeing a flood of capital into these investments that is going to consolidate the SFR space. Are Investors to Blame? Many people have bought into the narrative that investors are to blame for rising home values; that investors keep would-be homeowners out of the housing market. Of course, the reality

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ROI Starts with Understanding the True Value of the Property You Are Going to Purchase

The Bottom Line for Investors is Still the Bottom Line by Rick Sharga Perhaps nothing is more important to the success of a real estate investor than properly valuing a property. Over-paying for an investment property is one of the most common mistakes made—particularly by inexperienced investors—and can often be the difference between making a reasonable return on an investment and financial ruin. To a certain extent, investors buying properties to rent have a little more latitude than fix-and-flip investors, since they probably have a longer time horizon, and are less dependent on making a short-term profit on a sale. But, particularly in the case where a property is financed, the costs of over-paying can add up over time in terms of higher interest payments and lower monthly cashflows. And ultimately, when it’s time to sell the property, the profit will be smaller since the purchase price was higher than it should have been. But ultimately, most properties go up in value over time, so the rental property investor can make an error in valuing a property and still come out ahead in the long run. This is especially true in a housing market like today’s, with high demand and low inventory driving home prices to unprecedented levels. According to a recent report by RealtyTrac parent company ATTOM Data Solutions, median home prices nationwide rose 16 percent year over year in the first quarter of 2021 and were up at least 10 percent in most markets across the country. During what has now become a nine-year U.S. housing-market boom, equity has continued to improve because price increases have widened the gap between what homeowners owe on mortgages and the estimated market value of their properties. Freddie Mac recently noted that homeowner equity had increased to a record $23 trillion, as overall housing stock values rose to over $33 trillion. The ATTOM report said that the percentage of homeowners considered “equity rich,” (homeowners whose mortgage debt was less than 50 percent of their home’s value) had risen in 41states from the fourth quarter of 2020 to the first quarter of 2021. On the other end of the spectrum, homeowners who are seriously underwater on their loans (owing more than 125 percent of their home’s value) decreased by 49 percent during the same period. But the ATTOM report did suggest that some markets might be better than others for investors looking for good deals. For example, there are parts of the country where there are still a large number of homeowners who owe more than their homes are worth and might be candidates for short sales with their lenders. The top 10 states with the highest shares of mortgages that were seriously underwater in the first quarter of 2021 were all in the South and Midwest, led by Louisiana (13 percent seriously underwater), West Virginia (10.5 percent), Illinois (10.4 percent), Arkansas (9.2 percent) and Mississippi (9.1 percent). These are also all states where home prices are still affordable enough that an investor can buy a property, rent it out at a reasonable rate, and generate positive cashflow—something not as easy to do in some of the higher priced states like California, where the median property price is now over $800,000. Clearly, even though home prices don’t always go up in a straight line, the odds are in an investor’s favor if they plan to hold a property for any significant period of time. A small overpayment by a rental property owner—especially in one of the lower-priced markets noted above—can look somewhat trivial a decade later when a property has doubled in value, assuming the landlord has charged market-priced rent and kept the property occupied most of the time. For fix-and-flip investors, valuations can be a lot less forgiving The two most common mistakes made by fix-and-flip investors are overestimating the value of a property and underestimating the cost of necessary repairs. A 10 percent swing on these estimates, especially in an expensive market, can wipe out most or all of the profits. Flippers are also sometimes victimized by market timing—paying top dollar for a property expecting home prices to continue rising, only to see a market correction. In today’s red hot housing market, the temptation is to spend whatever it takes to buy a property, since prices have now gone up nationally for over 110 consecutive months, and demand continues to outpace supply. But it’s important to watch trends carefully, and to remember that local market conditions don’t always play out the same way the national headlines might suggest. Just to use two items from recent news headlines to put this into perspective, consider supply chain disruption and inflation—both results in one way or another of the COVID-19 pandemic. Flippers need to factor in material costs to their repair estimates. It seems unlikely that many of them planned on lumber prices increasing by almost 300 percent in the past year, but that’s exactly what happened. They probably also didn’t factor in appliances being on back-order for six months or more, yet real estate investors, homebuilders and homeowners alike are all still waiting for that new washer and dryer. For an investor with relatively high cost financing, extra months waiting to market the property can mean lower profits. As for inflation, many market analysts warn that if inflation continues to rise, mortgage rates are likely to follow. Most housing market experts agree that an increase in interest rates by as little as a point could seriously weaken demand among prospective homebuyers due to the historically high price of homes—affordability has been propped up by low interest rates and would suffer significantly if those rates suddenly went from 3 percent to 4 percent. Usually, this scenario results in home price appreciation slowing down, or even prices falling slightly. That’s good news for a flipper getting ready to buy a home, but not good news for a flipper who just bought one and now needs to sell it at a profit. Due to competition

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The “Why” of Valuation

Building Valuation Discipline by Michael Greene and Alex Villacorta Business school classes often demonstrate concepts like “the wisdom of crowds” or “the Winner’s Curse” by asking students to guess the number of jelly beans in a jar. Miraculously, the average guess of the class is typically quite close to the actual number of beans, while the range of guesses is distributed broadly. Never in question, however, is the precise number of jelly beans that represents the RIGHT answer. There is a finite and knowable amount of jelly beans, and whoever is “closest to the pin” has the best estimate. One would expect that valuing a home would work similarly. While it may be challenging for an individual appraiser, broker, or automated valuation model (AVM) to nail the value of a home, at least we can know ex post facto who made the closest estimate. It is as easy as determining who was “closest to the pin” when the home trades. But is it? What makes the definition of accuracy in the valuation space different from counting jelly beans is not only the “what” but the “why.” That is to say that the business objective the valuation supports is highly relevant to how one should measure that valuation’s accuracy. For example, a mortgage lender wants to know what value for the home is supported by its surrounding market, so that it does not face idiosyncratic risk from an overvalued individual asset relative to its MSA-level risk models. In this case, an accurate point estimate of the price at which a home will transact is less important than the most probable minimum value supported by enough comparable properties to imply a liquid resale market. A home seller or their agent would like to know what the highest bidder might be willing to pay for their home to formulate a listing and marketing strategy. Especially in times of tight inventory or when in possession of a unique home, this number is likely to be different from the mortgage lender’s number. Similarly, a retail home buyer wants to buy the house of their dreams as cheaply as possible. What matters to that buyer is not the intrinsic value of the home, relative to its neighborhood comps, but figuring out how to bid one penny more than the seller will accept (or competing bids). For these retail market participants, the most probable point-estimate of transaction price is what matters. An investor would like to know the after-repaired resale value or rental rate to determine whether the property will deliver the returns they expect. This requires not only an understanding of the home’s value today, but also both the average price and market depth of peer assets in the neighborhood with similar hedonic characteristics but an upgraded fit and finish. Customizing Valuation Discipline to Business Needs The consumers of home valuations face an increasingly broad array of product choices around which to build their valuation discipline. In the last decade, the availability of cheap computing and storage power has unlocked previously unimaginable datasets for use in automated valuations (AVMs). Richer data has allowed for better attribution of value to an expanded list of property attributes and as a result has led to significantly tighter error bands. This increase in accuracy has been so significant over the last decade that AVMs have evolved from offering limited use cases around free-to-the-consumer marketing to offering credible, underwrite worthy valuations at the asset level. Recently, the industry has focused innovation around clever combinations of man and machine, with a spectrum of options from condition-informed AVMs to hybrid appraisals. The physical constraints imposed by the COVID 19 pandemic have accelerated the adoption of these “cyborg” valuations by realtors, lenders, and investors, funding further vendor innovation. It is no longer sufficient to rely on industry-accepted best practices when choosing how to value homes. Instead, each practitioner must create a valuation discipline that maps their company’s unique “whys” to the “whats” that the market is offering. As Peter Drucker said, “what gets measured gets managed.” While human providers of appraisals and BPOs are typically measured against client outcomes, such as revision requests, automated or computer-assisted valuations lend themselves to systematic measurement and comparison. In constructing a valuation discipline, this is an enormous advantage to those of us steeped in interpreting these data, but presents dangerous pitfalls to those who are not. Vendors and Appraisal Management Companies (AMCs) aim to serve as many market participants as possible, each of whom, as described above, wants something different. In competing for business, these vendors aim to achieve good scores against universal benchmarks across national averages. For automated solutions, these may include accuracy (usually measured by median absolute percentage error, or MdAPE), systematic bias, hit rate, or large error risk (measured by percent of valuations within 5, 10, or 20 percent of the ultimate sale price), each of which is more or less important to a different client. In the case of human-powered valuation, revision request frequency and turn time become important considerations, and everyone is sensitive to cost. A client’s “whys” determine which of these benchmarks should define their evaluation process. Which Model is Best For You If you are the buyer or seller of an individual home (or their agent) looking for a quick independent source of value to corroborate your comparable market analysis, an “accurate” AVM, as defined by a low national average error rate (MdAPE) is probably less useful to you than a “not wrong” AVM, defined by a low probability of major error (PPE5 or PPE10). After all, what is the point of being right on average if the client is only buying one house? By contrast, an institutional investor using AVMs to conduct macroeconomic research and backtests may favor an AVM with no systematic bias and a high hit rate, rather than one that has a low probability of major errors. Being right on average is precisely this investor’s goal. Along the same lines, a mortgage lender looking to determine

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