Appraisal Smoothing: The Other Side of the Story

Appraisal smoothing has been widely accepted as an important factor to consider when analyzing real estate returns using appraisal-based data. In this paper, we demonstrate that the general applicability of the appraisal-smoothing arguments developed so far in the literature is limited by the assumptions upon which the arguments are based. We further show that the use of appraisal-based data can result in a higher (not lower) variance than that of true returns. Given this, it might be more fruitful to analyze the unique characteristics of real estate markets as possible explanations for the seemingly low variance observed in appraisal-based (or transaction-based) return indexes.