Wharton’s Benjamin Keys and Zillow.com’s Stan Humphries discuss the impact of automation on the home appraisal industry.
Property assessment has long been a solid industry with steady work for those willing to undertake the education and training required to enter the field. But that stability is changing thanks to automation. The number of appraisers is shrinking as software gets more accurate at valuing property and is increasingly integrated into the sale process. Benjamin Keys, Wharton professor of real estate, and Stan Humphries, chief analytics officer at online real estate marketplace Zillow.com, recently appeared on the [email protected] show on SiriusXM channel 111 to discuss the changes and where the industry is headed. (Listen to the podcast at the top of this page.)
Following are key takeaways from their conversation:
The margin of error is decreasing as automation improves.
Zillow offers a tool it calls Zestimate that uses input factors to determine the worth of a property. The Zestimate, which has been around since the website’s inception in 2006, cannot be considered an official, certified appraisal. But it’s a start, said Humphries. It’s also getting better as the company pours more resources into research and development.
“Back when we launched, we put in about 43 million homes and had a median error rate of close to 14%,” he said. “Today, we value about 100 million homes every single night and our error rate is down to 4.3%. So, we’ve made a lot of advances in the accuracy of valuing homes.”
Zillow is pushing for even greater precision. The company is offering a monetary prize for its teams that can get the algorithm’s error rate down to 2% or 3%.
“Computerized models are going to get very accurate, although in the end there’s probably some role for human beings to be involved there,” Humphries said. “The question is, what is that role of that human being? Right now, appraisers are professionals. They have a high degree of discretion, and there’s a bit of an art to what they do. In the future, there is a role to make sure that the facts the computer is using are accurate, but that’s more of a technician type job as opposed to professional.”
Keys credits Zillow for improving virtual assessment methods and said automation is an undeniably growing part of the industry.
“I think it’s only a matter of time until the technology is strong enough and cheap enough, from the standpoint of the lenders and the buyers, to cut out the humans from this process and move to more of an algorithm-based process,” he said.
Digital appraising can reduce confirmation bias.
Keys underscores that buying a home is a relatively infrequent transaction for the average American, so individuals have limited expertise in the valuation process. That’s where the professional appraiser comes in. He or she makes a reasonable assessment by examining a set of comparable properties nearby and making adjustments based on the finishes and other elements of the home.
“If I see a sofa on Craigslist; I don’t hire an external appraiser to argue about whether it’s worth $100 or $200,” he said. “But in this case, there’s a third party with money at stake, and that’s the lender or the investors. They want to make sure that their investment is appropriate and the value of the house is appropriate for the transaction.”
Still, even the most professional appraisers are vulnerable to the forces of the real estate market.
“One of the things we observed during the housing boom was a lot of pressure on appraisers to hit various prices, so the incentive problems there are really deeply entrenched,” Keys said. “The deck is already stacked to hit a certain appraisal number. That’s really problematic and can also lead to a driving up of house prices. All of these things are pointing towards the potential for technology to play a really important and potentially beneficial role.”
As comparable properties sell for higher and higher prices, the pressure on the appraiser increases. An appraiser who wants to hold the line on the price of a property runs the risk of not getting subsequent business.
“There have been a number of layers of regulation put into place to block that type of behavior where you’re shooting for a particular number,” Keys said. “But it is the case that the historical appraisal process led to the risk of being gamed and the risk of ratcheting up prices.”
Humphries agreed, saying there are countervailing incentives in the process.
“If you look at appraisal accuracy over a long period of time, 90% of the time appraisals come in above the purchase of sale agreement,” he said. “That leads you to believe there’s confirmation bias there, that appraisers are not individually valuing that home but justifying the price that’s already been agreed to. Normally, that doesn’t get you into that much trouble because home prices are increasing.”
However, the 2008 recession and real estate market collapse illuminated the problem of inflated home prices. The experts said automated appraisals could help take some of the air out of the balloon.
“Computerized models are going to get very accurate, although in the end there’s probably some role for human beings to be involved there.” –Stan Humphries
Will appraisers really be run out of the business?
The work of property assessment is transitioning from an art to a science, Keys said.
Most states require appraisers to have a college degree, complete an apprenticeship and have ongoing training. Extensive licensing is usually required. Keys said the industry has seen a decline of about 25,000 appraisers in the last decade, from about 120,000 to 95,000.
“As you begin to see the writing on the wall, why start on this treadmill? Why begin on this long process of being approved for an industry when there is relatively limited future growth?” he asked. “That’s really thinned out the pipeline of people who want to get into the appraisal business.”
Humphries noted that there is irony in the formidable licensing requirement, which creates a barrier to entry for new people but drives up wages for those who stay the course. “It’s not leading to folks trying to find an alternative to them.”
Fannie Mae and Freddie Mac are already experimenting with some automation, which will undoubtedly continue. Perhaps the future role of the appraiser will be as an arbitrator who offers a human check-and-balance to an automated system, Keys said.
“What’s the role of the appraiser going to be moving forward? Is this industry essentially doomed, or are they going to be playing a much smaller role?” he asked. “Whether the licensing barriers make sense as that transition occurs is something states are going to have to grapple with.”
Humphries pointed out that before automation supplants human appraisals, a cultural shift must occur. The current appraisal process is “very binary” for a lender, who wants the assessment to match the sale price exactly. But an automated valuation model (AVM) would mean thinking about the assessment in terms of a range.
“Is [the sale price] in the range that the model came up with? If you’re willing to trust a range, then a home could have that appraisal done in advance of the purchase of sale being agreed to,” he noted. “Right now, if the AVM comes in at 98 and the purchase of sale agreement is 100, that creates a problem.”
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