The Realities of Regression

on August 4 | in Featured Story, Newsletter | by | with Comments Off on The Realities of Regression

I recently attended the 2015 Valuation Expo which was held in Baltimore MD. As usual, it featured some interesting and useful CE sessions. Over the next few months, I want to share highlights and insights from some of the presentations that I think were particularly relevant to issues appraisers are dealing with right now. The first presentation I want to discuss was called “The Realities of Regression” by Ernest (Ernie) Durbin II, SRA, AI-RRS.

The use of Fannie Mae’s Collateral Underwriter (CU) tool by lenders has created some “hot topics” for appraisers. Durbin is encouraged by the use of CU and thinks it will be a good thing for the appraisal profession. One of these topics is the discussion around how to clearly show the methodology the appraiser used to arrive at the adjustment values. In this presentation Durbin proposes the use of “Regression Analysis” (RA) as a solution to this problem.

Durbin lamented there is a perception that appraisers make subjective, anecdotal, arbitrary, and unscientific adjustments. Now that CU will be looking at adjustments relative to other appraisals, appraisers are going to need to take a more transparent and scientific approach to arriving at adjustments. Currently appraisers have different reactions when confronted with the prospect of having to use regression analysis. Some appraisers ignore it, some hate it, some will play around with it, and some embrace it as a natural advancement of the profession.
Even though some appraisers may ignore or even hate thinking about using regression, Durbin points out the commentary underneath USPAP Standards Rule 1-1 (a), states, “each appraiser must continuously improve his or her skills to remain proficient in real property appraisal.” He says that there are really many good reasons, besides CU, that appraisers should be using regression. These include transparency for anyone reading the report, easily replicated results, the advantage of large data sets to support conclusions, the fact that you will learn something about your market, and that it will eventually save you time.

Even with all these reasons to be using regression analysis in your appraisals, Durbin did pause to explain that there are some drawbacks to using it. First, and this can be important, it doesn’t always work. This can happen for a number of reasons, but it’s usually due to data availability issues and/or unique properties. He also stated that regression is not always needed. The appraiser may have instances where the market indications are evident without it or where minimal or no adjustments are required. Finally, it may be misleading. You as an appraiser still need to apply your professional expertise and determine if the results make sense. Look to see if the adjustments are headed in the right direction and if the adjustment is reasonable in your professional judgement.

Durbin explained that there are actually many different tools available to help the appraiser with regression analysis. There are general “off-the-shelf” software packages such as SAVVI, Statwing, Redstone and Regression+. Academic software such as Excel, SPSS, Minitab and “R” are also readily accessible. Now, with the current appraisal spotlight on regression, many of your favorite appraisal software forms vendors have come out with new programs that will help you through the process. It is also important to note that not all your adjustments have to come from the regression. Durbin said that it is common to use the regression results for some adjustments and base others on different methodologies.

Now you may ask “how does all this fall in line with USPAP?” Well, Durbin basically looks at regression analysis as a tool for the appraiser so it can be thought of in the same way as an AVM. He discussed Advisory Opinion 18 (lines 97-103) and listed the five questions to which the appraiser should answer “yes” before deciding to use an AVM or RA in an appraisal or appraisal review assignment. These are:

  1. Does the appraiser have a basic understanding of how the AVM (RA) works?
  2. Can the appraiser use the AVM (RA) properly?
  3. Are the AVM (RA) and the data it uses appropriate given the intended use of assignment results?
  4. Is the AVM (RA) output credible?
  5. Is the AVM (RA) output sufficiently reliable for use in the assignment?

Just to be clear, Durbin pointed out that to answer “yes” to all these questions doesn’t mean that you have to know exactly how the tool you are using is built or the formulas it utilizes. What you need to know is how to use it, and be able to determine if the results it is producing are credible.

Durbin also provided some reconciliation commentary when you have used regression analysis in your report. Commentary will change with the results, but just to give you an idea here is one of the samples he provided: “In determining adjustments for differences between the subject and the comparables, regression analysis was utilized. This regression analysis was used as a starting point for adjustment factors and amounts. The values of the coefficients were then modified using sensitivity analysis. Below are the results of the regression analysis.”

If you need help getting started there are lots of sources for help these days. Durbin recommended taking more continuing education courses and/or online courses in statistics. He also recommended some Appraisal Institute texts:

  • “A Guide to Appraisal Valuation Modeling”
  • “Practical Applications in Appraisal Valuation Modeling – Statistical Methods for Real Estate Practitioners”

The bottom line is that it has always been good practice for appraisers to show how they calculated their adjustments. Now Fannie Mae and CU are shining the spotlight right on this issue. Durbin believes the profession needs to become more scientific and accountable. His hope is to get appraisers out of the “ignore it” and “hate it” columns and get them to at least “play with it” if not “embrace” the technology.

I will cover other interesting sessions from 2015 Valuation Expo in future issues.

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