In August 2020, a couple in Jacksonville, Florida, ordered an appraisal on their house so they could take advantage of low refinancing rates. As The New York Times reported, after their first appraisal came in suspiciously low, and the homeowners then made some minor decorating adjustments, a second appraisal valued their home a full 40% higher than the first. And what was the difference between the first and second appraisal? The perceived race of the homeowners had changed: The homeowners (a Black family) removed all signifiers of their race from the home in between the first and second appraisal. This example showcases a widespread and longstanding issue with real estate appraisals and racism in the United States.
If you’re just trying to get a foothold in the real estate market as a first-time homebuyer, you might still be learning the fundamentals of glossary terms like “appraisal.” But while you’re building your knowledge foundation, you should also be aware that real estate appraising has an unfortunate history — and a deeply entrenched and ongoing pattern — of bias and racism.
Redlining and other biased practices permanently depressed home values in certain minority neighborhoods in the 1930s. And that nearly century-old context continues to play out today, with negative effects for people of color in communities across the country.
This is an old, systemic problem that will take major cooperation at many levels to solve. But the good news is that researchers are shining more light on the issue and its effects, and some organizations are already working hard to help ease the burdens this issue has put on people of color.
Here’s what to know about real estate appraising and bias, with expert intel from researchers Junia Howell and Elizabeth Korver-Glenn, who dug deep into the issue for their sociological study, “Neighborhoods, Race, and the Twenty-first-century Housing Appraisal Industry.”
Real estate appraisals and racism
Unfortunately, biased real estate appraising is very real — and it’s not just in the past. Here are more details on the August 2020 incident involving appraisal bias as reported in The New York Times:
A Jacksonville, Florida couple wanted to have their home appraised as part of an effort to take advantage of low home-refinance rates as a result of the pandemic. But when they got their first appraisal, it seemed much too low — in fact, it seemed suspiciously low.
Background: Appraisers use comps to come up with a value for a house. That means they look for at least three comparable homes that recently sold, and use those sale prices to put a value on the subject house. But choosing comps is not an exact science.
If appraisers choose those comps based on factors other than their similar identity to the subject property, it can lead to a biased appraisal. For example, an appraiser might see family photos on bedside tables that reveal a homeowner’s race and then decide — consciously or unconsciously — that a Black homeowner’s property is more comparable to homes in predominantly Black neighborhoods instead of to recently sold homes in their own neighborhood.
The most accurate comps should come from the most similar homes that are closest in proximity to the subject property and that have sold most recently; when appraisers start comparing homes across different neighborhoods and developments but closer comps are available, or when they use older comps but more recent sales are available, then this can be a sign that the appraiser is relying on factors other than the property itself to influence the appraisal.
To test their theory that racism was at play in this scenario, the Jacksonville couple eliminated all signs of Blackness from their home — swapped out family photos, removed certain books and holiday cards, and other minor changes — and got it appraised a second time. This time, they found the appraisal price increased by 40%. (Think about that: a full 40%!)
That’s just plain bias: As this Florida couple’s anecdote indicates, sellers may suffer from a “Black tax,” with some Black sellers accruing less value in their homes than a comparable white seller would, even in the same neighborhood.
And speaking of taxes, there’s also a measurable tax assessment gap that places “a disproportionate fiscal burden on racial and ethnic minorities.” Black and Hispanic residents have a 10% to 13% higher tax burden than white residents for the same assortment of public services.
So when — and how — did this all start?
The bias in today’s appraisal system goes back to the 1930s and the now-notorious practice of redlining.
“Roosevelt had just gotten elected on the promise to restore the economy. His administration argued a key component should be enabling more middle-class families to become homeowners. To do this, they fundamentally restructured the housing market,” explains the appraisal bias study’s co-author Elizabeth Korver-Glenn, assistant professor of sociology at the University of New Mexico.
To do this, the government made homes more affordable by changing the average mortgage term from between three and five years to 30 years, and also considerably reduced the amount of money required for down payments. To incentivize banks to provide these higher-risk loans, the federal government agreed to insure them … on the condition that the homes were appraised.
“They needed to have a formal assessment of value — one that used the federal government’s color-coded maps,” explains Korver-Glenn. “Now often referred to as redlining, these maps ranked neighborhoods as more valuable and thus worthy of loans if they were occupied by white and middle-class residents.”
Asian, Black, Latinx, and Indigenous communities were ranked as “risky” investments and given low property values. Groups like the NAACP spent years trying to show how this practice systematized racial discrimination.
Eventually, the federal government passed laws forbidding the explicit use of these maps or neighborhood racial composition in the appraising process; the landmark Civil Rights Act of 1968 included a number of Fair Housing provisions to try to ameliorate segregation. Still, appraisers kept determining home values based on previous sales, or comps, which perpetuated the problem despite these new laws and regulations.
Obviously, by using the old sales prices that were explicitly based on race, appraisers kept finding that properties in white neighborhoods were worth more, and that those in communities of color were worth less. All of that is to say: Redlining has permanently depressed home values in some minority neighborhoods.
“Multiple researchers and policy think tanks have repeatedly shown homes in Black and Latinx communities are worth considerably less than homes in white neighborhoods,” explains Howell, assistant professor in the department of sociology at the University of Pittsburgh. “In some cities, the average appraisal value in white neighborhoods is seven times the value in communities of color.”
For their study, Howell and Korver-Glenn used statistical regression models to hold some variables constant — things like the size and amenities of a house, neighborhood attributes like schools and crime, and real estate demand. This way, they were able to compare houses that are really similar, in really similar neighborhoods.
“When we are comparing apples to apples, racial disparities persist,” Howell explains. “Moreover, the influence of racially unjust laws and policies is inseparable from all the other factors used to explain the disparities. In short, no matter how you slice it, there are stark racial inequalities in appraisal values — inequalities that have only gotten worse over time.”
What is the effect of this biased appraising?
In short, it’s just plain bad for homeowners of color — who have suffered the equivalent of $48,000 per home, or $156 billion in cumulative losses, according to a report from the Brookings Institution.
Consider biased appraising’s negative effect on perpetuating racial wealth gaps. “Home values and their appreciation rates are directly related to wealth accumulation,” Howell says.
“For most U.S. families, their home is their largest asset. As their home appreciates in value, their wealth increases, enabling them to fund their retirement, their children’s college education, or unexpected expenses like large medical bills.”
So it’s clear to see how redlining was key in creating a racial wealth gap. And the researchers’ work shows that one reason that gap hasn’t just persisted but has in fact doubled since 1980 is the increasing racial inequality in home values. Now, the median wealth of a white household is 20 times greater than the median wealth of Black households, according to Pew Research Center.
Then there’s the affordable housing crisis. With home prices rising so dramatically, housing costs now make up a larger proportion of everyone’s expenses. But it’s families who have historically owned homes in white neighborhoods who can afford these increased costs because their appreciating home values have expanded their wealth. “For everyone else, high housing costs are simply a burden,” Howell explains.
Beyond that, local governments fund public schools, libraries, parks, infrastructure, transportation, and other services with property taxes — yes, property taxes that are determined based on home values. So naturally, that means white communities with systematically higher home values also have better funded public services, increasing their access to better education, parks, and other desirable neighborhood attributes.
How can we solve this?
Some nonprofits, like the mission-driven lender and developer IFF, are offering loans on an income-based approach instead of using comps or replacement costs to assess property value. And that’s a great start.
But since this problem is so entrenched, solving it is going to take major cooperation on a big scale. “Given this problem is rooted in the very foundation of the appraisal industry and was institutionalized by the federal government, addressing it will require both the federal government and industry leaders,” Korver-Glenn says.
That means first addressing the wealth gaps created from decades of appraising homes in this pattern.
Korver-Glenn proposes that will require reparations, such as land or cash transfers (or both) that, “much like the New Deal, reshape who has access to opportunities.”
Beyond that, she says, we need to change appraisal practices in a systematic way. One example she offers is comp selection. When individual appraisers choose comps for a home, they might unintentionally or deliberately overlook the best comps — the most recent sales of homes that are most similar to the subject property. Leaving comp selection to the full discretion of appraisers “enables biases to continue,” she says.
The researcher also suggests a need to reimagine appraisal training, so that individual appraisers can be more aware and help balance out historically unfair practices.
Indeed, this is a systemic problem, and it will require deep systemic changes to solve it for good.
“Fully tackling racism with the U.S. housing system will require rethinking its very foundation,” Korver-Glenn notes. “We need new, bold federal legislation that reshapes how we buy, sell, manage, and inhabit housing — legislation that prioritizes the housing of people over profit.”
Header Image Source: (Eduardo Sánchez / Unsplash.com)