Bias in the Home Appraisal Process

Home appraisal refers to the process of having a qualified professional offer an assessment of the value of a home. Appraisals are a vital part of buying and selling homes 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 doesn’t exceed the value of the underlying property.

Homeownership in the United States is a large part of wealth creation, with estimates placing two-thirds of the wealth of a typical American household in home equity. Racist policies have affected the historical development of homeownership in the country. Recent studies have indicated that the persistent devaluation of Black and other minority-owned homes is consistent with continued discrimination, constituting a significant factor in the growing racial wealth gap.

Appraisal Discrimination

A 2020 inspection of U.S. Census Bureau data from 1980 to 2015 revealed that the racial composition of a neighborhood shaped home values more in 2015 than in 1980, which the researchers identified as a key factor driving the growing racial wealth gap. Over that 40-year time span, homes in White neighborhoods had appreciated in value by about $200,000 more than similar homes in communities of color, the researchers found.

Several studies released in recent years have corroborated the idea that discrimination has impacted the appraisal process, with stories of discrimination appearing in the news media. For example, a 2018 study by the Brookings Institution concluded that the devaluation of homes in neighborhoods with a majority-Black population has led to $156 billion in cumulative losses, amounting to about $48,000 per home.

The Appraisal Institute, the largest professional association of real estate appraisers, has acknowledged that racial bias plays a part in the professional valuations of homes.

Sources of Discrimination

According to some academic accounts, the discriminatory impact of the appraisal process is bound up with historical practices surrounding the valuation of homes, which tended to emphasize the neighborhood location of a home 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 appraising “perpetuate racial inequality” or, in some cases, even make it worse, in two main ways. First, the main method of establishing value, the “sales comparison approach,” relies on previous sales while doing nothing to address that these sales were made under an “explicitly racialized system.” Therefore, the article argues, the method preserves historical racial bias. Second, racial stereotypes retain a role in shaping the contemporary valuation of homes through the use of “comparable neighborhoods” in estimating value.

FHA Loans and Appraisal Discrimination

Appraisals became common under the Federal Housing Administration (FHA), a government organization created in the Franklin D. Roosevelt presidential administration in 1934 to encourage middle-class families to buy homes. The goal of appraisals was to make foreclosures less likely to entail financial loss on mortgages. This was of special interest to the FHA, which insured mortgages and, consequently, assumed the risk.

Historical processes, such as redlining, caused racial gaps in property valuation that the appraisal process extends. Redlining and other discriminatory practices, such as restrictive covenants, kept communities of color from accessing federally backed mortgages and housing. The FHA—which systematically adopted color-coded maps to value a house by the desirability of its neighborhood—continued to use these racially biased maps until 1977. According to researchers, this had two effects:

1. It led to a higher home appreciation for White homeowners.
2. It denied minority borrowers access to the less expensive, federally insured loans tied to use of these maps, in effect extending segregation-era policies and making wealth harder to achieve for communities of color.

Antidiscrimination Laws

Toward the end of the 20th century, laws were established that made it illegal to discriminate in housing. For example, the 1968 Fair Housing Act, passed during the Lyndon B. Johnson presidential 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 provide credit. In 1977, the U.S. Congress 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 low- and moderate-income neighborhoods.

Investigations of homeownership rates have shown that significant gaps persist, and studies that probe the value gap in homes have found that homes in largely White neighborhoods continue to appreciate more than homes in neighborhoods of color. A 2019 congressional hearing included testimony about the Brookings finding, mentioned earlier in this article, that found that Black homes had been systematically undervalued. The hearing was related to a bill, which stalled in the Senate, that would have allowed state-licensed appraisers to conduct appraisals for federally backed FHA mortgages as a way of dealing with an appraiser shortage.

A 2020 article, also discussed earlier here, found that the gap in appraisal valuations between homes in largely White neighborhoods and those in majority Black and Latinx neighborhoods has grown, putting specific figures to the undervaluation of homes in communities of color. It reported that homes in White neighborhoods had appreciated about $200,000 more than those in neighborhoods of color, expanding the racial wealth gap, which has “doubled since 1980.”

FAQs

The Bottom Line

A large share of wealth in the United States is connected to homeownership. Consequently, appraisals are an important aspect of building wealth, and bias can sustain and extend historical injustices and inequalities.

Having acknowledged bias in the process, the Appraisal Institute has suggested a program for addressing discrimination, including unconscious racial bias training, updating professional ethics and guidelines, and offering scholarships to encourage more diversity in the appraisal industry.

At an event for the Federal Reserve Bank of Minneapolis in March 2021, scholars outlined steps that they said would limit and reduce inequality in housing. The proposals included basing the valuation of homes on the natural resources required to build them, a reevaluation of the secondary mortgage market, offering low interest rates to historically disinvested communities, and reparations.