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 dat a. In this paper, we demonstrate that the general applicabi:ity of the appraisal-smoothing arguments developed so far in the literature is l imited by the assumptions upon which the arguments are based. We furth er show that the use of appraisal-based data can result in a higher (n ot lower) variance than that of true returns. Given this, it might be more fruitful to analyze the unique characteristics of real estate mar kets as possible explanations for the seemingly low variance observed in appraisal-based (or transaction-based) return indexes.