Market Feedback and Valuation Judgment: Revisited
Appraisers receive feedback from a variety of sources such as other appraisers, clients and the real estate market. Previous studies find client feedback to introduce an upward bias into commercial and residential appraisal judgments. Hansz and Diaz (2001) find that the provision of transaction price (market) feedback for a previously valued property biases commercial appraisers upwardly in subsequent valuations. The authors provide market optimism, client feedback and a reduced conservatism bias as explanations for their findings. However, previous client and market feedback studies were conducted in upward-trending or booming real estate markets. The identified upward bias in valuation judgments may have been the result of positive real estate market conditions. This study investigates the impact of transaction price feedback on residential appraisal judgment in a changed appraisal task environment, characterized by a depressed housing market, market pessimism, conservative lenders and a changed residential appraisal industry. As Hansz and Diaz (2001) find an upward appraisal bias in an upward-trending market, I expect market feedback to introduce a downward bias into residential appraisal judgments in a depressed market. Compared to a “no feedback” control group, residential appraisers receiving the feedback that their previous value estimates were too high, compared to the realized transaction price, are expected to make significantly lower subsequent value judgments for an unrelated property. The “too low” feedback is not expected to have an impact on subsequent value judgments. I test the hypotheses with a controlled experiment using a pre-posttest design. The experimental design has one factor (transaction price feedback) fixed at three different levels (“too low”, “too high”, “no feedback”). A posttest-only validity control group is added to test for a potential testing bias in the pre-posttest design. This study uses residential expert appraisers, defined as active Oregon State certified residential appraisers, from the Portland metropolitan statistical area (MSA) as subjects. Experimental subjects are randomly selected from a list of all certified residential appraisers in the Portland MSA. Experimental subjects are randomly assigned to the control and treatment groups (10 subjects per group; N=40). Subjects in the treatment groups and pre-posttest “no feedback” control group are asked to value a lot of vacant residential land in the geographically unfamiliar Roswell, Georgia. After they provide their value estimates for this first valuation case, subjects in the treatment groups are given a note from a seller’s broker stating the transaction price for the previously valued property. Subjects in the “too high” feedback group receive a transaction price that is 15% below their estimates and subjects in the “too low” feedback group receive a transaction price that is 15% above their value estimates. The control group receives no feedback. All treatment and control groups are then given a second (unrelated) valuation case of vacant residential land in Newnan, Georgia and asked for their value estimate. The experiment is concluded with an exit questionnaire containing demographic and professional questions as well as manipulation checks. The experimental data are analyzed using the parametric independent samples t-test. The assumptions of normality and equal variances are not violated by the dataset. A one-way ANOVA and the non-parametric Mann-Whitney U test are used as robustness checks. All statistical tests conclude that neither the mean of the “too high” feedback group nor the mean of the “too low” feedback group are statistically different at the 5% level from the mean of the “no feedback” control group. Thus, no evidence is found that transaction price feedback biases residential appraisal judgments in a depressed market. The insignificant results are further analyzed to assess whether they are due to a non-reception of the treatment by subjects, low statistical power or a non-existing relationship: The explanation that subjects did not read the treatment note can be excluded. A power analysis reveals low statistical power and very small effect sizes for both treatments. An alternative explanation for the insignificant results is the absence of the hypothesized relationship. The main client group of experimental subjects is appraisal management companies, which due to legislation passed after 2007, work with appraisers on behalf of lenders. As a consequence, residential appraisers do not receive direct client feedback anymore (compared to Hansz and Diaz, 2001) and may not respond subconsciously to the “too high” feedback.