Why Black Families Face Inequality in House Appraisals
Homeownership is one of the key ways for people to build wealth in the United States. But white Americans are much more likely to own homes than Black or Latinx Americans, and their homes are also worth more, says Junia Howell, a sociologist who studies housing appraisals.
“Homes in white neighborhoods are worth, on average, almost $250,000 more than comparable homes and similar socioeconomic Black and Latinx communities,” Howell said.
This is called appraisal bias.
One major reason for that, Howell said, is that homes in predominantly white neighborhoods are often appraised at more than comparable homes in predominantly Black or Latinx neighborhoods. “The racial inequality in appraisals is growing over time,” she said.
The gap nearly doubled between 1980 and 2015. One of the main factors appraisers consider in determining how much a house is worth is how much other, comparable homes nearby have sold for recently. And after years of redlining, segregation, and other forms of housing discrimination, “When you compare homes to others in neighborhoods that have been discriminated against, you essentially recycle discrimination over and over again,” Andre Perry at the Brookings Institution said. It’s a vicious cycle.
“That can really determine how much wealth you accumulate by owning your home,” Elora Lee Raymond at Georgia Tech said. “And so that is going to contribute hugely to the wealth gap in this country because home equity is 50% of household wealth.”
How do appraisers work and how did redlining start?
To determine a property’s value, appraisers assess its condition, size, and location, among other factors. They also use similar properties that have been recently sold as a key basis for comparison.
Appraisers are regulated by state agencies, which are then regulated by the appraisal subcommittee of the Federal Financial Institutions Examinations Council, a body that coordinates with banking regulators.
While appraisers generally defend their practice and say instances of alleged appraisal bias are still rare, the industry has taken note of the complaints.
Trade groups such as the Appraisal Institute and the American Society of Appraisers (ASA) have introduced new initiatives to increase diversity among its ranks and combat bias in the profession.
The National Housing Act of 1934, which established the Federal Housing Administration (FHA), gave birth to “redlining” – a practice in which banks literally created “residential security” maps with red lines that designated where to avoid making loans. The FHA made it harder to obtain mortgage insurance and federal guarantees in communities of color, so banks avoided working in those communities.
Even though the FHA-driven redlining only applied to home mortgages, appraisers and financial institutions used the maps to set value for all types of lending. Capital became scarcer across the board. And when the supply of capital drops, the price of capital goes up – so communities of color paid higher prices for their capital, thus extracting even more capital from those communities. Scarcity and higher capital prices over a long period deter investment, which deflates price. Values drop.
The consequences of appraisal bias for Black homeowners
This vicious circle played out from the 50s thru the 60s and then became illegal after the passage of the Civil Rights Act in 1968. But while banks cannot legally discriminate and draw circles around communities anymore, the legacy of redlining has forever lowered the (appraised) value of land and properties in these areas, where Fair-housing advocates have long pointed to evidence of persistent racial discrimination in housing.
Decades of research have revealed bias in mortgage lending, including the harmful legacy of redlining. Undercover investigations have exposed pervasive discrimination by some real estate brokers, with agents being accused of steering Black home buyers away from White areas or denying them basic information to make a home purchase easier.
Communities of color were also targeted with risky subprime loans at the height of the housing boom in 2006, studies show, contributing to foreclosure rates nearly twice as high as for white people when the market collapsed.
Like banks and brokers, home appraisers must abide by the Fair Housing Act of 1968 which outlawed discrimination based on race, religion, national origin, or gender. But the industry is coming under increased scrutiny as Black homeowners complain that their homes are being appraised for less than those of their White neighbors.
The accusations of bias come as the country continues to reckon with the legacy of generations of housing discrimination and its long-term effects on Black homeownership rates.
Today, about 42% of black households own a home compared with 72% for whites, Census Bureau data shows, a gap not seen in nearly 50 years.
What is the Real Estate Industry doing about appraisal bias?
“As an industry, we’re all concerned about the homeownership gap for Blacks and we need to roll up our sleeves and figure out what those barriers are,” says Bryan Greene, vice president of policy advocacy for the National Association of Realtors, who oversaw enforcement of the Fair Housing Act at the Department of Housing and Urban Development before joining the realty group. “As we dedicate more attention to that, it’s going to uncover issues throughout the entire industry that need our attention and that includes the appraisal industry.”
There is no national database of discrimination complaints against appraisers. The few that were filed to the Department of Housing and Urban Development totaled just six in 2020 compared with three in 2019.
An analysis by the American Enterprise Institute, a public-policy think tank, found that allegations of intentional or unintentional racial bias in appraisals on refinance loans were “uncommon and not systemic.” The group compiled hundreds of thousands of appraisals on transactions that actually closed. The research combines data from several sources, including Collateral Risk Network’s survey of Appraisal Management Companies and Lenders, Home Mortgage Disclosure Act data, and AEI Housing Center’s national housing market database.
Fair housing advocates say that it is not uncommon for appraisal bias complaints to go unreported by discouraged homeowners and that consumers often don’t recognize when they are being discriminated against.
“When buyers of color face discrimination in the marketplace, it can discourage them from the whole process,” said Lisa Rice, president, and chief executive of the National Fair Housing Alliance. She says compiling data from closed property sales does not take into account home deals that fell apart after a lower appraisal. “And research shows that in many cases, especially when the appraisal differences are slight, consumers won’t realize that bias could have been a factor in lowering the value of their homes,” adds Rice.
Despite the lack of hard data on discrimination complaints, some states are tightening oversight of the industry as anecdotal evidence of appraisal bias piles up.
Robert Schwemm, a professor emeritus of law at the University of Kentucky, says proving discrimination in appraisals is difficult, but tighter oversight at the state level could increase awareness.
“Homeowners will have a better understanding of their rights when it comes to the appraisal process,” says Schwemm, author of “Housing Discrimination: Law and Litigation. “And the added level of scrutiny will make the industry more aware of the stakes.”
What is the Biden administration planning to do about appraisal bias?
President Biden pledged to create national standards for home appraisals as part of an effort to eliminate racial discrimination in the real estate industry.
The measures would “ensure appraisers have adequate training and a full appreciation for neighborhoods and do not hold implicit biases because of a lack of community understanding,” the campaign said.
Elora Lee Raymond at Georgia Tech said the Biden administration’s plan to address racial discrimination in home appraisals is an important step, “but it doesn’t necessarily make it possible for Black households to become homeowners. It doesn’t really do much about that.” One thing that would, Raymond said, would be some kind of down payment assistance.
The effort is part of a broader housing plan aimed at lifting minority homeownership rates by calling for tax credits for first-time home buyers and expanding regulations on mortgage lenders and insurers, among other measures.
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