HousingWire, June 20, 2024
On Thursday, two U.S. regulators–the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC)–announced their approval of a final rule imposing quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers.
As appraisers, navigating the landscape of property valuation has always been a delicate dance between art and science. The recent approval by federal regulators for the use of Automated Valuation Models (AVMs) in mortgages represents a significant juncture in the industry—one that prompts reflection on the unintended consequences that may arise from relying too heavily on technology over human judgment.
While AVMs offer a data-driven approach to property valuation by crunching numbers and analyzing market trends, they risk overlooking crucial nuances that define the fabric of real estate valuation. Real estate, unlike many other assets, is deeply intertwined with emotions, intangible attributes, and factors that defy simple analytical quantification.
The potential unintended consequences of widespread AVM usage in mortgages are multifaceted. Firstly, AVMs may struggle to capture the unique characteristics and idiosyncrasies of individual properties that can significantly impact their value. Factors such as curb appeal, neighborhood dynamics, and subjective aesthetics play a substantial role in property valuation, often eluding the algorithms of AVMs.
Moreover, real estate transactions are often laden with complexities that extend beyond raw data points. The negotiation process, sentimental value attached to a home, and localized market dynamics all contribute to the final price agreed upon—a realm where human appraisers excel in their ability to contextualize and interpret information beyond the numbers.
As appraisers, we recognize the value that technology brings in terms of efficiency and speed in the valuation process. However, we also caution against diminishing the role of human expertise and nuanced judgment in the valuation of real estate. AVMs, while powerful tools, should be viewed as complementary rather than a substitute for the nuanced insights that appraisers bring to the table.
The reliance on AVMs in mortgages may inadvertently lead to homogenization in property valuations, overlooking the subtle variations and unique attributes that can significantly affect a property's worth. Real estate valuation is an intricate dance between tangible and intangible factors—a dance that appraisers are trained to navigate with sensitivity and acumen.
As we navigate this new frontier of AVM integration in mortgages, it is essential for appraisers, lenders, and regulators to strike a balance between technological innovation and the human touch that is intrinsic to the world of real estate valuation. By acknowledging the limitations of AVMs and leveraging them alongside human appraisal expertise, we can ensure a more comprehensive and accurate approach to determining property values while preserving the essence of real estate as a domain where emotions and qualitative factors hold significant sway.