Thursday Dec 01

Fall 2022

COMMUNITY DEVELOPMENT CORNER - Appraisal Bias: Disturbing Comfortable People

Woody Guthrie asserted that “It’s a folksinger’s job to comfort disturbed people and to disturb comfortable people.”  One group of people that has been too comfortable for too long is the appraisal industry.  But that may be changing as some disturbed people are rising up.

In June 2019 Abena and Alex Horton decided to put their home on the market.  Abena, who is African American, met with an appraiser who appraised the home at $330,000.  They thought this was low.  So they removed all their family photos and had Alex, who is white, meet with another appraiser who said the home was worth $465,000.  They shared their story on Facebook and received 2,000 comments from disturbed people who said the same thing happened to them. One African American woman took her complaint to HUD and reached a $50,000 settlement with JP Morgan Chase, which acknowledged no wrongdoing but provided this payment and instituted new fair housing training programs for its appraisers.

Many stories of such “whitewashing” have been reported in recent years and there is growing evidence of systematic bias in the appraisal industry.  Fair housing advocates, government officials, and many within the industry are starting to take notice and action.

Housing valuations have long been lower in non-white than in white neighborhoods by as much as 23% today according to a Brookings Institution report.  Historical redlining by Federal agencies, ongoing redlining and predatory lending by financial institutions, blockbusting, highway construction, concentration of public housing, and racially restrictive covenants, underassessment of properties in white neighborhoods and overassessment in black neighborhoods by tax assessors, exclusionary zoning are just some of the well-known practices that have created segregated neighborhoods and lower property values for people of color.

Relatively little attention has been paid to the “contributions” of the appraisal industry.  But it has been a significant contributor.  Up until the 1970s training materials used by the American Institute of Appraisers included the following example to illustrate neighborhood analysis; “The neighborhood is entirely Caucasian. It appears there is no adverse effect by minority groups.” 

Appraisers rely on their understanding of the recent sale of comparable properties.  But the “comps” are often not comparable and when several options are available lower-valued homes are often selected in diverse urban neighborhoods. Adjustments to properties (e.g. updated electrical system, installation of a new bathroom) may be missed.  Sometimes appraisers are not familiar with the neighborhoods of the properties they are evaluating, in part because it is a predominantly white industry.  According to the Bureau of Labor Statistics 97.7% of professionals in the appraisal industry are white and 70% are men. Implicit (along with explicit) bias may creep in at several points in this process.

Whatever the underlying practices are, the end results are systematic disparities in the appraisal of homes in white and non-white neighborhoods.  Last Fall Freddie Mac conducted a study that examined 12 million appraisals (not proxies for appraisals that have been used in much recent research) compared to the contract sale price for property transactions between 2015 and 2020.   Homes in majority Black neighborhoods were appraised below the contract price in 12.5% of cases compared to 15.4% in Latino neighborhoods and 7.4% in white neighborhoods.  Among individual buyers 8.6% of Blacks, 9.5% of Latinos and 6.5% of whites received appraisals below the contract price.  These findings were not the result of the occasional “bad apple.” More than half the appraisers in the study had a higher percentage of appraisals below the contract price in black than in white census tracts. Unfortunately, the raw data have not been made publicly available, the implications of which are discussed below.

These disparities, and the inaccuracies in many appraisals, are costly to all parties to these real estate transactions, and more.  Buyers rely on accurate appraisals to assure full value of their purchase.  Sellers rely on them to get a fair price.  Homeowners rely on appraisals when refinancing in order to get full value for the equity in their homes. 

When appraisals fall below the contract sale price deals often fall through.  People lose homes they hoped to buy, current owners lose the sale. Real estate agents and mortgage originators lose fees.  When families buy a home they often purchase kitchen appliances, furniture and other household goods that are not purchased when the sale falls through. Sometimes the price is renegotiated and the buyer gets a lower price, but the seller loses money they rightfully should have and property values in the neighborhood go down. And, of course, today’s sales become tomorrow’s comps, baking in lower values over time.

The many problems associated with appraisal bias are getting noticed.  President Biden  created a 13 agency task force on Property Appraisal and Valuation Equity (PAVE) that is working with industry representatives, fair housing groups, and others.  In their report, “Action Plan to Advance Property Appraisal Equity” released on March 23 they offered several recommendations to improve oversight of appraisals, educate and empower consumers, ensure that technological alternatives do not violate fair housing rules, enhance training to better educate and recruit a more diverse work force, and improve coordination among federal agencies.

The appraisal industry has started to take notice. The Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural appraisers and the Massachusetts Board of Real Estate Appraisers announced an initiative last Fall to address unconscious bias and discrimination, develop training programs, review their code of ethics statements, and take steps to bring more people of color into the field. And the Appraisal Institute, together with the National Urban League and Fannie Mae, created the Appraisal Diversity Initiative designed to attract more minority appraisers into the field and increase diversity.  More can be done. These various national initiatives are important steps in the right direction.  But it has taken a recent local study to call for what may be the most effective response, beginning with public disclosure of key appraisal data.

In its July 27 “Final Report and Recommendations” the Philadelphia Home Appraisal Bias Task Force, led by Cherelle Parker, majority leader of the city council, calls expressly for such action in that city and cities around the nation. This report recommends several steps to increase the fairness and accuracy of appraisals, recruit and train a more diverse work force, educate consumers and other steps to eliminate appraisal bias in that city as well as other cities nationwide.  More importantly, it calls for disclosure of key data that would enhance organizing, education, and enforcement efforts. 

(Full disclosure, I am a member of this task force.)

To facilitate reforms of the appraisal process the Philadelphia report calls for a national disclosure law for the appraisal industry similar to the Home Mortgage Disclosure Act.  HMDA requires most mortgage lenders to disclose the location, race, income and a variety of other data on loan applications along with the disposition (e.g.approved or denied) of all applications. Availability of HMDA data, (coupled with requirements of the federal Community Reinvestment Act that prohibits redlining, the Fair Housing Act and other fair lending rules), have led directly to community benefits agreements that have provided billions of dollars in credit to traditionally underserved markets. For example, just since 2016 the National Community Reinvestment Coalition has negotiated such agreements with 19 banks totalling more than $541 billion in mortgage, small business and community development investments. 

A similar law for the appraisal industry (which is also covered by the Fair Housing Act and other fair housing rules) would have a similar effect on that industry.  Appraisers should be required annually to publicly disclose the following information for each appraisal they have conducted; the census tract of the property, the appraised value, contract sale price of the property, whether a reconsideration of value was requested (which sellers can request when they are unhappy with the initial appraisal) and the outcome of those requests.  This would enable researchers, advocates, public officials and others to identify for each appraisal firm the share of appraisals on properties in low-income and non-white communities, the frequency with which consumers request a reconsideration of value, the share of appraisals that are below contract sales prices and how this ratio varies by race of applicants and racial composition of neighborhoods, and more. These data could then be used to identify targets for further research and possibly enforcement action.  But more importantly this could incentivize better service in traditionally underserved neighborhoods.

Cities, counties, non-profits (hospitals, universities, foundations) and others engaged in the buying and selling of real estate who use the services of appraisers could develop lists of favored appraisal firms.  Just as preferences are offered to minority, women, and veteran owned firms, entities that use appraisal firms should give preference to those with a track record of serving traditionally underserved communities.  Such preferences should also be required of private businesses who contract with or receive economic development subsidies from cities, counties, and states.

If Woody Guthrie were alive today, he probably would not be an appraiser.  But his words still offer guidance for much of American life, including the way we appraise and house our communities.

Gregory D. Squires is a Research Professor and Professor Emeritus in the Sociology Department at George Washington University

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