Information Losses in Home Purchase Appraisals

We exploit a unique data set to show that the mortgage application process creates an incentive to substitute the transaction price for the true appraised value when the latter is lower. We relate the frequency of information loss (appraisals set equal to transaction price) to market conditions and other factors that plausibly determine the degree of distortion. Information loss in appraisals may increase the procyclicality of housing booms and busts.