Bias in the home appraisal process


Home valuation refers to the process of having a qualified professional assess the value of a home. Appraisals are an essential part of the process of buying and selling a home in the United States, especially if a mortgage is attached to the property and the appraisal is used to ensure that the value of the loan does not exceed the value of the underlying property.

Homeownership in the United States is a big part of wealth creation, with estimates placing two-thirds of a typical American household’s wealth in home equity. Racist policies have affected the historic development of home ownership in the country. Recent studies have indicated that the persistent devaluation of homes owned by blacks and other minorities is compatible with continued discrimination, being a major factor in the growing racial wealth gap.

Key points to remember

  • An appraisal refers to the process of establishing an independent appraisal of a property or home, which is common when a mortgage is involved in buying, selling, or refinancing a home.
  • The Appraisal Institute, the largest professional association of real estate appraisers, has recognized that racial bias plays a role in professional home appraisals.
  • A 2018 Brookings Institution study concluded that devaluation of homes in predominantly black neighborhoods resulted in cumulative losses of $ 156 billion, or about $ 48,000 per home.

Assessment discrimination

A 2020 inspection of US Census Bureau data from 1980 to 2015 found that a neighborhood’s racial makeup shaped home values ​​more in 2015 than in 1980, which researchers identified as a key factor in the origin of the growing racial wealth gap. During that 40-year period, homes in white neighborhoods appreciated about $ 200,000 more than similar homes in communities of color, the researchers found.

Several studies published in recent years have corroborated the idea that discrimination has had an impact on the assessment process, with stories of discrimination appearing in the press. A 2018 study by the Brookings Institution, for example, found that devaluing homes in predominantly black neighborhoods resulted in cumulative losses of $ 156 billion, or about $ 48,000 per home.

The Appraisal Institute, the largest professional association of real estate appraisers, has recognized that racial bias plays a role in professional home appraisals.

Sources of discrimination

According to some academic evidence, the discriminatory impact of the appraisal process is linked to historical practices surrounding home appraisal, which tended to emphasize the location of a house in the neighborhood and have historically been influenced by racist policies such as redlining.

An article published in the journal Social problems in 2020 argued that modern approaches to assessment “perpetuate racial inequality” or, in some cases, even exacerbate it, in two main ways. First, the primary method of valuing, the “sales comparison approach”, builds on previous sales while doing nothing to remedy the fact that those sales were made under a contract. “Explicitly racialized system”. Therefore, the article argues, the method preserves historical racial prejudices. Second, racial stereotypes retain a role in shaping contemporary home valuation through the use of “comparable neighborhoods” in valuation estimation.

FHA loans and valuation discrimination

Appraisals became common under the Federal Housing Authority (FHA), a government organization created under the Franklin D. Roosevelt administration in 1934 to encourage middle-class families to buy homes. The aim of the valuations was to make foreclosures less likely to result in financial losses on mortgages. This was of particular interest to the FHA, which insured the mortgages and therefore assumed the risk.

Historical processes, such as redlining, have caused racial discrepancies in the valuation of properties that the valuation process expands. Redlining and other discriminatory practices, such as restrictive covenants, have prevented communities of color from accessing federally guaranteed mortgages and housing. The FHA, which consistently adopted color-coded maps to rate a home for its neighborhood appeal, continued to use these racially-biased maps until 1977. According to researchers, this had two effects:

  1. This led to a greater appreciation of the house for white homeowners.
  2. It denied minority borrowers access to cheaper, federally insured loans tied to the use of these cards, in effect extending the policies of the era of segregation and making wealth harder for them to attain. communities of color.

Anti-discrimination laws

Towards the end of the 20th century, laws were established which made discrimination in housing illegal. The Fair Housing Act of 1968, for example, passed under the Lyndon B. Johnson administration, made it illegal to discriminate on the basis of race or ethnicity in housing. The Equal Credit Opportunity Act of 1974 extended protections against discrimination to places that offer credit. In 1977, the United States passed the Community Reinvestment Act, which, in the words of the Federal Reserve, requires banking regulators to “encourage financial institutions to meet the credit needs of the communities in which they do business.” ”, Especially in countries with low and moderate interest rates. income neighborhoods.

Surveys of homeownership rates have shown that large gaps persist, and studies that explore the home value gap have found that homes in largely white neighborhoods continue to appreciate more. than houses in colored neighborhoods. A congressional hearing in 2019 included testimony to the Brookings finding, mentioned earlier in this article, which found that black houses had been systematically dumped. The hearing was linked to a blocked Senate bill that would have allowed state-approved appraisers to conduct appraisals for federally-backed FHA mortgages to address a shortage of appraisers.

The 2020 article, also discussed earlier in this article, found that the gap in valuation ratings between homes in predominantly white neighborhoods and those in predominantly black and Latin neighborhoods has widened, putting numbers specific to the undervaluation of homes in communities of color. He reported that homes in white neighborhoods had valued about $ 200,000 more than homes in colored neighborhoods, widening the racial wealth gap, which has “doubled since 1980”.

What is a home appraisal?

A home appraisal is an appraisal of the value of a property and is used to ensure that the value of a mortgage is not greater than the value of the property.

Has Racial Discrimination Affected Home Ratings?

Yes. Numerous studies, including one carried out in 2020 by the US Census Bureau, have shown that homes in white neighborhoods are more valued than those in minority communities, and the problem is getting worse and not diminishing.

What solutions to inequalities in the valuation of houses have been proposed?

Solutions offered include unconscious racial bias training, updating professional ethics and guidelines, and providing scholarships to increase diversity among home assessors.

The bottom line

Much of the wealth in the United States is tied to homeownership. Therefore, valuations are an important aspect of wealth creation, and prejudices can support and extend historical injustices and inequalities.

Having recognized the biases in the process, the Evaluation Institute suggested a program to address discrimination, including training on unconscious racial bias, updating ethics and professional guidelines and offering scholarships to encourage greater diversity in the evaluation sector.

At an event hosted for the Minneapolis Federal Reserve in March 2021, researchers described measures they believed would limit and reduce housing inequalities. The proposals included the basis of valuing homes on the natural resources needed to build them, reassessing the secondary mortgage market, offering low interest rates to historically divested communities, and repairs.

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