From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Appraisal Institute

Have I written about Thomas Bayes yet?

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I had the very real pleasure of speaking at the Appraisal Institute’s annual meeting this past July in Dallas, and indeed I’ve been asked to speak there 3 of the past 4 years — a great group and a very well-done conference.  My topic this year was on “Practical Statistics for Practicing Appraisers”, and given the need for continuing education credit, my talk was scheduled for two hours.  Unfortunately, two hours is either w-a-a-a-a-a-y too much time, or not nearly enough, depending on what you want to do with it.

About the only thing I could do was touch base on a dozen or so different useful topics, talk about the highs and lows of each, and point the audience in the right direction to get more information.  One topic I wish I’d spent more time on was Bayesian Statistics, a little-known and under-appreciated branch of statistical inference which, in fact, has significant every-day impacts on how we analyze (or at least SHOULD analyze) data.  For example, let’s say that I want to determine the house price trend in a particular town, and have no idea what that trend looks like.  I’ll want to construct some sort of “best linear unbiased estimator” (such as a time-series regression) to help me sort all that out.

However, what if afterwards, in that same town, I’ve already measured the overall property trends, but now I’m told that half of the town is known to be contaminated.  Do I still want to use the same estimators, or should my methodology be informed by what is now “prior knowledge” about both the existence of the contamination and the overall price trend in the town?

This use of prior knowledge falls into the category of “Bayesian Statistics”, or “Bayesian Inference”, developed by early-18th century theologian and mathematician Sir Thomas Bayes.  In short, Bayes noted that our inferences could be improved by the existence of prior knowledge.  What’s more, when we’re conducting a Bayesian investigation, our data gathering is anything but random, since we’re seeking data based on our prior knowledge of the situation.  In the contamination matter, I may want to look at price trends for homes in the contaminated neighborhood versus price trends for homes in the non-contaminated neighborhood.  Naturally, I’ll only focus my attention on properties that have actually transacted, which leads to a common problem in this sort of analysis where properties that have not transacted (which may contain different information) are not part of the data set.

Unfortunately, a lot of practical appraisal — particularly in the residential setting — is heuristic, and over-reliance on “prior knowledge” can lead to a level of sloppiness.  That said, a rigorous application of Bayes’ principles, and careful analytical techniques, can allow appraisers to actually develop statistical measures for their valuation work.

Written by johnkilpatrick

August 20, 2015 at 11:26 am

Appraisal Institute meeting in San Diego

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I had the pleasure of being invited to speak at the Appraisal Institute’s annual meeting in San Diego last week, which brought together many of the top minds in the valuation field for three days of seminars and business meetings.   While AI is fairly small (only about 23,000 members globally), its influence in the real estate field cannot be understated.  In the U.S., appraisal license law and standards (the Uniform Standards of Professional Appraisal Practice, commonly known as USPAP) owe their genesis to work done by AI back in the 1980’s during the Savings and Loan Crisis, and possession of an AI designation (either MAI or SRA) is frequently cited in  real estate contracts as required for establishing lease renewal rates or other contractual matters.  Courts throughout the land routinely accept testimony from AI members without question.  Real estate regulatory bodies throughout the U.S. are populated by AI members, and rare is the state legislature that will make changes to real estate law without the consultation of AI members.  The AI’s government affairs team in D.C. has influence throughout the real estate arena, which of course today transcends traditional boundaries and includes regulatory efforts of the GAO and SEC, among others.

I was asked asked to deliver an address on advanced statistical methods.  I’ll leave that discussion for another day, and focus on what I learned there — which was significant — rather than what I said.  Other sessions dealt with meaty topics like the attorney/appraiser interface and the complexity of real estate valuation in the financial reporting arena.  Not unexpectedly, there was a tremendous amount of attention paid to technology, which is really leading to an interface between “automated valuation model”-type tools and the individual appraiser.  In short, we may be very close to a day, thanks to technology, when the individual home appraiser is tapping into a more robust set of analytical tools in order to produce collateral valuations with strong statistical support.  Anyone who has been following the mortgage meltdown news for the past few years will understand the significance.

The keynote speaker was Dylan Taylor, CEO/USA of Colliers International.  He riffed off of the title of the book “The Earth is Flat”, and talked about barriers to globalization in the real estate biz which he called “rounders”.  The two principle ones for our field are regulatory barriers (licensure problems, even across 50 states, much less across countries) and capital needed to grow businesses (technology, etc.)  He notes that in most professions, there is a tipping point to consolidation, and uses CPA firms as examples.  The total billings of U.S. CPA firms last year was about $120 Billion, and the big 4 accounted for $80 Billion of that.  The need for technology, increased specialization, etc., will probably stimulate that in appraisal firms (which currently have world-wide billings on the order of $3 Billion, but the top few only account for a small fraction of that).  He says that in the future, there will be a handful of very large appraisal firms plus “boutiques”.  In his view, the boutiques will do quite nicely, but the middle-market appraisal firms will die on the vine.

Taylor notes that USPAP will be generally moving toward International Valuation Standards (“IVS”) in the same way Generally Accepted Accounting Practice (“GAAP”) is moving toward International Financial Reporting Standards (“IFRS”).  The latter sets of standards provide much more “client defined” reporting standards.   He notes, for example, that several aspects of IFRS will cause “disruptive change” in American real estate, such as the way the two different paradigms treat carried interest.

As noted, a separate session dealt with the interface between appraisal and financial reporting.  Earlier this year, the SEC “kicked the can” toward 2013 for U.S. adoption of IFRS.  It was noted that while 90% of GAAP and IFRS are functionally identical, the changes needed to adopt the remaining standards could be so costly and disruptive as to dwarf the problems following adoption of Sarbanes-Oxley.  Nonetheless, some movement in that direction is inevitable.  From a real estate perspective, this may include the elimination of depreciation for financial reporting, substituting annual “mark-to-market” valuations instead.  That is a very different paradigm for property valuation in the U.S.

Other sessions included a presentation from the FDIC’s General Counsel’s office, a presentation on standards and practices for Federal land acquisition, and a VERY informative presentation on “getting published”.

Written by johnkilpatrick

August 8, 2012 at 6:11 am

International Financial Reporting Standards

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I know I’m sounding like an overly technical geek on these subjects, but as we know from the recent (current?) economic malaise, seemingly back-page issues can have major impacts on large segments of the economy.

Buried deep inside Friday’s issue of the Wall Street Journal (OK, page C1, but that’s pretty deep) was news that the SEC will once again delay implementation of the International Financial Reporting Standards (“IFRS”) for U.S. regulated businesses (from a practical standpoint, essentially all of them).  For those who aren’t up on their accounting theory, U.S. accounting standards — generally referred to as “Generally Accepted Accounting Practices” or “GAAP” for short — have been developed over time from essentially three sources:  “best practices” which have evolved literally over the centuries, pronouncements of the Financial Accounting Standards Board, or “FASB”, and its predecessors, and adaptations to conform with U.S. tax practice.  IFSR is more of a top-down approach, and governs accounting practices pretty much anywhere in the developed world EXCEPT for the U.S.   (One might argue, and with some validity, that recent accounting problems among Chinese businesses reveal real problem with IFRS compliance, and one wouldn’t be altogether wrong.  That’s a topic for a different day, though.)

American businesses dealing in global commerce (as nearly all big ones do, now-a-days) have been anxious for a unifying accounting paradigm for many years.  Indeed, the differences between IFRS and GAAP are significant, and in fact adoption of IFRS in the U.S. may cost many businesses quite a bit in tax penalties, since IFRS doesn’t recognize certain tax avoidance strategies (e.g. — last-in-first-out inventory accounting) that are common in the U.S.  Nonetheless, American businesses are willing to suffer the tax pain in order to get a common accounting language globally.

From an accounting perspective, this delay by the SEC is a royal pain in the neck, but that too is a topic for another day.  The reason I bring it up today is the implicit impact on real estate appraisal standards.  I’ve noted, with some interest, that appraisal standards are increasingly derivative of accounting practices.  Back when America’s Uniform Standards of Professional Appraisal Practice (“USPAP”) was developed, accountants could barely care about appraisal standards.  Today, a close examination of the International Valuation Standards Council (IVS) reveals a substantial degree of input from the accounting and banking fields, much more than we saw 25-ish years ago when USPAP was first codified.

In my own observation, this SEC delay gives the appraisal profession another year or so to decide if they want a top-down or bottoms-up approach to appraisal standards in the U.S.  Do appraisers want to be driving the truck or riding in the back?  I’ve observed that the three constituent “regulatory” bodies (the professional organizations, such as the Appraisal Institute and RICS, the Appraisal Foundation, and the state and federal regulators) seem to be of three different minds on the subject.  The constituent bodies seem to be more proactive and ready to move forward with IVS adoption.  The Foundation seems to have been constantly playing damage control in the past couple of years over the mortgage market meltdown and the resultant sturm-and-drang from the Federal regulatory bodies.  None of those regulatory bodies seemed to have a dog in this hunt, so haven’t appeared to care.  I will say, however, that proposed changes to USPAP 2014, which are currently being circulated in draft form, are very forward-looking, albeit with baby steps.

Finally, state regulators are almost 100% reactive.  Some are very good at reacting, and some are very bad.  Currently, they are all overwhelmed with the double-whammy of very real budget cuts and very real appraisal standards violations problems emanating from the mortgage market meltdown.  As such, a major paradigm shift in appraisal standards will be difficult for them to swallow.

This all seems to be back-page stuff, but in fact these issues have very real implications for the way “business does business”, particularly in the real estate valuation world.  We’ll keep you posted.

Written by johnkilpatrick

July 8, 2012 at 4:43 am

American Real Estate Society annual meetings

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ARES is one of the two primary real estate academic organizations in the U.S.  (The other is the American Real Estate and Urban Economics Association, “AREUEA”).  While most real estate academics are members of both, ARES also attracts a significant number of practitioners (typically ex-professors who are now in the consulting or investments business) plus has a great relationship with such practitioner organizations as the Appraisal Institute and the Royal institution of Chartered Surveyors.  ARES publishes several of the top real estate academic journals, including the Journal of Real Estate Research (for which I’m a reviewer), the Journal of Real Estate Literature, the Journal of Real Estate Practice and Education, the Journal of Real Estate Portfolio Management, the Journal of Housing Research, and the Journal of Sustainable Real Estate (for which I’m on the editorial board).

ARES holds its annual meeting in April, usually in a coastal city on alternating sides of the US.  This year’s meeting was last week at St. Pete Beach, Florida (an island just off the St. Petersburg coast), and we believe we set a record for attendance at a real estate academic conference.  Several hundred working papers and panel presentations dominated the program, along with sessions featuring research from doctoral students, and a well-attended, day-long “Critical Issues Seminar” on Wednesday co-sponsored by the Appraisal Institute and the CCIM Institute.

I presented papers in sessions, including one I chaired (“Real Estate Cycles”) and participated in an excellent panel discussion on Friday on “Real Estate Failure”, chaired by my good friend Dr. Gordon Brown of Space Analytics (and featuring Dr. Larry Wofford of U. Tulsa, Dr. Richard Peiser of Harvard, and myself).

I’m still digesting the huge volume of intellectual content that came out of ARES, and I’ll probably discuss some of these papers in future blog posts.  More later!

Housing News

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I was just at a luncheon (sponsored by the local chapter of the Appraisal Institute) on apartments.  One of the speakers noted that a real problem in doing adequate analysis was getting a handle on the single-family housing market — the data simply stinks due to the foreclosure mess, the number of homes being turned into rentals, etc.  Thus, as we try to ALSO project the future of the homebuilding industry (really down for the count the last few years), that same dirty-data problem is a real issue.

That aside, the National Association of Homebuilders released a report today noting that the NAHB/Wells Fargo Housing Market Index rose in February for the fifth consecutive month.  As I discussed back in November (click here for a link) this index attempt to project home sales based on model home traffic, customer inquiries, and such.  Even though the over all stock market was down today, this news sent homebuilder prices higher — indeed, Beazer Homes (BZH) rose by 3.1%, albeit to just over $3/share.

NAHB’s Chief Economist David Crowe said, “this is the longest period of sustained improvement we have seen in the HMI since 2007.”  Great news for homebuilders — we hope it stays this way.  For a full copy of the article, on Fox Business News, click here.

Written by johnkilpatrick

February 15, 2012 at 4:54 pm

Valuation Colloquium

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I’m writing this from the audience at an invitation-only colloquium on real estate valuation, held at Clemson University and sponsored by a number of high profile groups, including Argus Software, the Appraisal Institute, the Homer Hoyt Institute, the Maury Seldin Advanced Studies Institute, and of course Greenfield Advisors.

This is the third in a series of such advanced meetings, begun in 1964 and held roughly every 20 years. The first was at the U. Wisconsin, and the second at U. Connecticut. The purpose of these gatherings is to bring together both top academic scholars as well as the top practitioners to discuss the future of the profession, both organizationally and methodologically. The past meetings were decidedly U.S. in focus, while this year’s meeting is co-hosted by Nick French (U.K.) and Elaine Worzala (U.S.) and has substantial European, Latin American, and Pacific Rim participation. Consistent with the rapid changes in the field, future colloquia will be held more frequently, and the next one is tentatively slated for Oxford, England.

Papers and proceedings of the meeting will be published in the Journal of Investment and Finance in the near future.

Written by johnkilpatrick

November 13, 2010 at 8:11 am

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