Appraisal: Technology's Impact and the Appraiser Shortage

Chapter 12: Appraisal: Technology’s Impact and the Appraiser Shortage

I. Introduction: The Appraisal Landscape in Transition

The appraisal profession is currently navigating a confluence of factors, including technological advancements and a dwindling workforce. This chapter explores the intricate relationship between these elements, examining how technology both addresses and exacerbates the appraiser shortage. We will delve into the underlying economic principles, regulatory changes, and demographic shifts that contribute to this dynamic environment.

II. The Appraiser Shortage: A Multi-faceted Problem

• A. Aging Workforce and Attrition:

  • The U.S. Department of Labor identified an aging appraiser population in 2006 and predicted a shortage by 2012 due to natural attrition. This trend stems from the demographic shift where older appraisers retire, and fewer younger individuals enter the profession. This creates a supply-demand imbalance where the demand for appraisal services outstrips the available appraiser pool. This can be modeled using a basic supply and demand framework:
    • Let Q represent quantity, P represent price, S represent supply, and D represent demand. A decrease in the number of appraisers (S) leads to a shift in the supply curve to the left, resulting in a higher equilibrium price (P) for appraisal services.

• B. The Impact of the 2008 Financial Crisis and Dodd-Frank Act:

  • The 2008 financial crisis significantly impacted the appraisal industry. The subsequent Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while intended to prevent future crises, inadvertently contributed to the appraiser shortage.
  • Appraisal Independence Requirements (AIR): These regulations aimed to prevent undue influence on appraisers by lenders, loan brokers, and other parties involved in mortgage transactions. While promoting objectivity, it disrupted established business models for many appraisers and loan brokers, leading some to leave the field.
  • Appraisal Management Companies (AMCs): Dodd-Frank mandated AMCs to pay appraisers “reasonable and customary fees.” The definition of this term remains contested, and many appraisers perceive AMC fees as suppressing their income.
  • Increased Educational Standards: The Appraiser Qualification Board (AQB) implemented more stringent educational requirements, making it more challenging and time-consuming for individuals to become licensed appraisers. The increased burden further deterred potential entrants into the profession.

• C. Mathematical Modeling of appraiser supply❓:
  The appraiser supply (S) can be thought of as a function of multiple variables:

  • S = f(A, R, E, C)

  Where:

  • A = Number of active appraisers
  • R = Retirement rate of appraisers (representing attrition)
  • E = Entry rate of new appraisers
  • C = Compliance costs, including regulatory burden and education

  An increase in R (retirement rate) or C (compliance cost) will decrease S (appraiser supply), contributing to the shortage. Similarly, a low E (entry rate) will fail to offset attrition.

III. Technology’s Impact: A Double-Edged Sword

• A. Efficiency Gains and Workflow Optimization:

  • Technology has revolutionized appraisal workflows, enabling appraisers to complete assignments more efficiently.
  • Mobile Technology: Smartphones, tablets, and specialized apps allow appraisers to collect data in the field, take photos, measure properties, and access property information in real-time. This reduces time spent on site and improves accuracy.
  • Automated Data Analysis: Software platforms can automatically populate appraisal forms with property data, comparable sales information, and market trends. This reduces manual data entry and minimizes errors.
  • Geographic Information Systems (GIS): GIS technology provides appraisers with detailed maps, property boundaries, and demographic data, enabling them to analyze neighborhood characteristics and identify comparable properties.
  • Electronic Measuring Devices (Laser distance measurers): Accurate and fast measurements are more easily gathered than with traditional methods.
  • Example: An appraiser like Andy Money in the PDF extract, using mobile technology to efficiently collect data, reducing the inspection time from perhaps 3 hours using older methods, to 1.5 hours with newer tools.

• B. Technology and Reduced Workload:

  • The time (T) required to complete an appraisal can be represented as a function:

    • T = f(D, A, I)

    Where:

    • D = Data collection time
    • A = Analysis time
    • I = Inspection time

    Technology reduces all three aspects, so we might re-write this to be:

    • T = f(D(t), A(t), I(t)), showing the influence of time, t, and therefore technology, on those components. The derivative of each component with respect to time is negative, meaning it takes less time as technology develops.

• C. Algorithmic Valuation Models (AVMs) and Automation Concerns:

  • Automated Valuation Models (AVMs) use algorithms to estimate property values based on statistical analysis of historical data.
  • Statistical Foundation: AVMs rely on regression analysis and other statistical techniques to identify relationships between property characteristics❓ (size, location, amenities) and sales prices.
    • Example: A multiple linear regression model can be used to predict property value:
    • Value = β0 + β1Size + β2Location + β3Amenities + ε
    • Where β are the regression coefficients and ε is the error term.
  • Potential for Displacement: AVMs have the potential to automate certain appraisal tasks, particularly for simpler properties in well-defined markets. This raises concerns about potential job displacement for appraisers.
  • Limitations: AVMs are not a replacement for human appraisers. They cannot account for unique property characteristics, market nuances, or subjective factors that influence value. Additionally, they are limited by the quality and availability of data.

• D. Barriers to Technology Adoption:

  • Cost: Implementing new technologies can be expensive, particularly for smaller appraisal firms or individual appraisers. The investment in hardware, software, and training can be a barrier to adoption.
  • Lack of Training: Appraisers may lack the necessary skills and knowledge to effectively use new technologies. Adequate training and support are essential for successful adoption.
  • Resistance to Change: Some appraisers may be resistant to change and prefer traditional appraisal methods. Overcoming this resistance requires demonstrating the benefits of technology and providing ongoing support.

IV. Addressing the Appraiser Shortage: Strategies and Solutions

• A. Streamlining the Appraisal Process:

  • Regulatory Reform: Reducing unnecessary regulatory burdens and streamlining the licensing process can encourage more individuals to enter the profession. This might include revisiting certain Dodd-Frank provisions or streamlining AQB education requirements.
  • Technology Integration: Encourage the adoption of technology by offering training programs and financial incentives to appraisers. This could include subsidies for purchasing appraisal software or tax credits for technology upgrades.
  • Data Standardization: Establish standardized data formats and protocols for sharing appraisal information between appraisers, AMCs, and lenders. This would improve efficiency and reduce errors.

• B. Expanding the Appraiser Pool:

  • Recruitment Initiatives: Launch targeted recruitment campaigns to attract younger individuals and diverse candidates to the appraisal profession. Highlight the opportunities for career advancement and the potential for high earnings.
  • Mentorship Programs: Establish mentorship programs pairing experienced appraisers with aspiring appraisers to provide guidance, support, and training.
  • Partnerships with Educational Institutions: Collaborate with colleges and universities to develop appraisal degree programs and certificate courses. This would provide a more structured and accessible pathway into the profession.

• C. Redefining the Appraiser Role:

  • Embrace Specialization: Encourage appraisers to specialize in niche areas, such as green building appraisals, commercial appraisals, or litigation support. This would allow them to develop expertise in specific areas and command higher fees.
  • Focus on Consulting Services: Expand the role of appraisers to include consulting services, such as market analysis, property valuation, and investment advice. This would diversify their revenue streams and reduce reliance on traditional appraisal assignments.

V. Practical Applications and Related Experiments

• A. Experiment: Comparing Appraisal Completion Times:

  • Conduct an experiment to compare the time required to complete an appraisal using traditional methods versus using technology-enhanced methods. Divide a group of appraisers into two groups: a control group using traditional methods and an experimental group using technology such as mobile apps and automated data analysis tools. Measure the time it takes each group to complete a set of appraisal assignments and analyze the results using statistical analysis (e.g., t-test) to determine the effectiveness of technology in reducing appraisal completion times.

• B. Case Study: Technology Adoption and Appraiser Income:

  • Conduct a case study to examine the relationship between technology adoption and appraiser income. Survey a group of appraisers about their use of technology and their income levels. Analyze the data using regression analysis to determine whether there is a correlation between technology adoption and income. This could also involve interviewing high-income earners and lower-income earners to examine what technology and techniques were used.

• C. Simulation: Impact of AVMs on Appraiser Demand:

  • Develop a computer simulation to model the impact of AVMs on the demand for traditional appraisal services. The simulation could incorporate factors such as the accuracy of AVMs, the availability of data, and the willingness of lenders to accept AVM-based valuations. The simulation could be used to project the future demand for appraisers under different scenarios.

VI. Conclusion: Navigating the Future of Appraisal

The appraiser shortage is a complex issue with no easy solutions. Technology offers the potential to improve efficiency and increase productivity, but it also raises concerns about job displacement. By adopting a comprehensive approach that addresses regulatory burdens, expands the appraiser pool, and embraces technology strategically, the appraisal profession can navigate these challenges and ensure its long-term viability. The future of appraisal requires a proactive and adaptable approach, embracing technology while preserving the essential role of human judgment and expertise.