Although appraisers should always fully analyze market conditions and develop and apply appropriate adjustments to appraisals, with the current softening in market activity, Freddie Mac and its Single-Family Chief Appraiser and Mortgage Credit Risk Management Valuation Director, Scott Reuter, see this as being more important than ever.

“While many appraisers do a great job, some are reluctant to perform this analysis, which exposes their work to ongoing quality issues and Freddie Mac to potential overvaluation or undervaluation risk, depending on market movement,” Reuter told Valuation Review. “We recognize that rapidly fluctuating markets present unique challenges for appraisers, who must ensure they are analyzing and measuring movement as markets change, both up and down.”

As to why this is so important, Reuter noted that proper analysis and accurate reporting of market conditions are vital to ensuring credible property valuations. Appraisers, he added, need to keep in mind that a credible opinion of market value must be based on a thorough analysis of market conditions and that USPAP requires a credible opinion to be based on relevant evidence (data) and logic (analysis).

“Accuracy here impacts not only appraisal credibility, but also our risk models at Freddie Mac, which consume this data too,” Reuter said.

“When developing an opinion of value, it is important to reflect movement of market conditions in the final reconciliation of value. In a market that is experiencing declining house prices, the appraiser should consider whether it is appropriate to reconcile near the lower end of the indicated value range, rather than at the midpoint.”

“This is another area where data shows a common behavior for appraisers to reconcile at or near a midpoint value indication, regardless of current market trends,” Reuter added.

Lenders play key roles in this matter, Reuter told us. Freddie Mac encourages lenders to carefully review the appraisals they receive and to consistently provide feedback to appraisers that reinforces the importance of an accurate market condition analysis.

As Freddie Mac emphasized in its 2021 article, “Appraisals in Rapidly Changing Markets”, an accurate market condition analysis is truly the backbone of the appraisal and, when developed properly, results in an analysis that is consistent and defendable across any level of review.

“Freddie Mac Single-Family Seller/Servicer Guide Section 5603.4 addresses unacceptable appraisal practices,” he said. “It reminds lenders that appraisal practices that involve the use of inordinate adjustments for differences between a subject property and comparable sales that do not reflect the market’s reaction to such differences, or the failure to make proper adjustments when they are clearly necessary, are unacceptable.”