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Working Paper 18-03: Appraisal Accuracy and Automated Valuation Models in Rural Areas

Published: 4/19/2018
Alexander N. Bogin, Senior Economist; Jessica Shui, Senior Economist



Accurate and unbiased property value estimates are essential to credit risk management. Along with loan amount, they determine a mortgage’s loan-to-value ratio, which captures the degree of homeowner equity and is a key determinant of borrower credit risk. For home purchases, lenders generally require an independent appraisal, which, in addition to a home’s sales price, is used to calculate a value for the underlying collateral. A number of empirical studies have shown that property appraisals tend to be biased upwards, and over 90 percent of the time, either confirm or exceed the associated contract price. Our data suggest that appraisal bias is particularly pervasive in rural areas where over 25 percent of rural properties are appraised at more than five percent above contract price. Given this significant upward bias, we examine a host of alternate valuation techniques to more accurately estimate rural property values. We then include these alternate value estimates when modeling delinquencies and examine their explanatory power.

A revised version of this paper has undergone external peer-review and is published in an academic journal with open (free) access. Citation: Alexander N. Bogin, Jessica Shui. 2019. "Appraisal Accuracy and Automated Valuation Models in Rural Areas." The Journal of Real Estate Finance and Economics, 1-13. https://link.springer.com/article/10.1007%2Fs11146-019-09712-0

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