Under Fannie Mae's Selling Guide, an appraiser supports a time adjustment with a home price index (HPI) for the subject's market. The index was 212.0 in the comparable's contract month and 222.6 in the effective-date month. The comparable sold for $380,000. What time-adjusted price does the index indicate?
Correct Answer
C) $399,000
An index adjustment multiplies the price by the ratio of the effective-date index to the contract-month index: 222.6 / 212.0 = 1.05, so $380,000 x 1.05 = $399,000. Leaving the price unadjusted gives $380,000; computing the 10.6-point change as a percentage of the later index (4.76%) gives $398,095; and treating 10.6 index points as 10.6% gives $420,280.
Why This Is the Correct Answer
Option C is correct because the index rose from 212.0 to 222.6, a ratio of 1.05, or 5%. Applying that to the $380,000 price gives $399,000.
Why the Other Options Are Wrong
Option A: $380,000
Option A, $380,000, leaves the sale price unadjusted. The index rose from 212.0 to 222.6, so the price is multiplied by 222.6 / 212.0 = 1.05, giving $399,000.
Option B: $398,095
Option B, $398,095, measures the 10.6-point change against the later index: 10.6 / 222.6 = 4.76%. The change should be measured from the starting level, 10.6 / 212.0 = 5%, giving $399,000.
Option D: $420,280
Option D, $420,280, treats the 10.6-point rise as 10.6%. Index points equal percentages only when the starting index is 100; from 212.0 the rise is 5%, giving $399,000.
New over old, times price
Put the effective-date index on top and the contract-month index on the bottom, then multiply by the comparable's price.
How to use: Use this whenever a question gives two index values and asks for an adjusted price.
Exam Tip
Check the direction of the result: in a rising index, the adjusted price must be higher than the sale price, and the percentage change is based on the earlier index.
Common Mistakes to Avoid
- -Leaving the sale price unadjusted when the index has moved
- -Reading index points as percentage points
- -Measuring the change against the later index level
Concept Deep Dive
Analysis
Applying an index is a two-step ratio task: find the percentage change from the contract-month level to the effective-date level, then apply it to the comparable price. The base for the change is the earlier index level, and index points are not percentages unless the base is 100.
Background Knowledge
Fannie Mae accepts home price indices as support for time adjustments, along with statistical analysis, modeling and paired sales, provided the report summarizes the evidence and data sources. An index tracks relative price levels over time, so the adjustment is the ratio of the two relevant index values.
Real-World Application
An appraiser uses a local HPI to adjust a comparable that went under contract several months before the effective date. The report states the index source, the two index levels and the resulting 5% adjustment.
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