Fighting Appraisal Bias

How the Government and Housing Industry Can Better Address this Discriminatory Practice

By David Wheaton
Economic Justice Policy Fellow

Denver residents Gwen and Lorenzo Mitchell decided to take advantage of soaring property prices and remodel their home back in 2021. Their three-bedroom property sits in a racially-diverse area where homes typically sold for $450,000 to $550,000, according to a Washington Post report. But the appraisal process yielded some pretty unexpected results. The appraiser, who came to evaluate the home when Lorenzo and the couple’s three children were there, reportedly valued the home at $405,000 — a much lower rate than the couple anticipated.

Shocked, the couple scheduled a second appraisal. This time, Gwen met with the appraiser while alone at the family’s home. The second appraiser gave the home a value of $550,000, according to the report — a $145,000 increase from the first appraisal.

The only thing that changed in the home from the first appraisal to the second appraisal, the Post reported, was the person who the appraiser thought lived there: Lorenzo is Black. Gwen is white.

What is Appraisal Bias? Tracing its History

The couple’s experience, unfortunately, isn’t unusual. It’s part of a longstanding prejudicial housing practice known as appraisal bias. Appraisal bias is discrimination in the appraisal process, such as assigning a lower value to a home because of the race or ethnicity of the person who lives there. A home appraisal is the process through which a real estate appraiser determines the fair market value of a home. Critically, a home’s value can affect how much equity homeowners can take out for a loan to pay for education and other expenses, and how much the homeowners pay in property taxes, among other things. People who endure appraisal bias suffer financial fallout not because of the actual value of their home, but because of the color of their skin.

Appraisal bias is most often perpetuated by the person determining the home’s value — the real estate appraiser. The most common appraisal method is the sales comparison approach, in which appraisers determine the value of a home by looking at the amount for which “comparable” homes sold. Unfortunately, what homes are “comparable” can be subjective, creating a system where bias can flourish.

@naacp_ldf Do racist redlining policies still impact #homeownership ♬ original sound - NAACP Legal Defense Fund

The origins of this discriminatory practice date back decades. The original redlining maps created by the federal Home Owners Loan Corporation (HOLC) in the 1930s codified the views of appraisers and others at the time that homes in Black communities were worth less than homes in other communities. These maps were used to classify certain areas as a higher financial risk for home lenders, according to the March 2022 Action Plan to Advance Property Appraisal and Valuation Equity published by a Biden administration interagency task force. Black neighborhoods and other neighborhoods of color were classified as the riskiest for lenders, affecting access to credit for communities of color, according to the action plan — and, ultimately, home values.

One of the foundational documents of property appraisal practices, Frederick Babcock’s influential 1931 manual “The Valuation of Real Estate,” claimed that neighborhood decline results inevitably from occupation by “…the poorest, most incompetent, and least desirable groups in the city,” according to action plan’s summary of the history of valuation bias in the U.S. housing market. Babcock’s manual described how “…racial heritage and tendencies seem to be of paramount importance” in influencing property values. According to 2022 testimony from Lisa Rice, President of the National Fair Housing Alliance, this perception was reinforced in appraiser manuals through the mid-1970s – and there are still appraisers working today who were trained when these racist standards were in place.

Congress has installed guardrails against appraisal bias, but the measures fall short in practice. In 1988, Congress amended the Fair Housing Act to bar home appraisers from taking race, sex, or any other federally protected characteristic into account when evaluating an applicant’s creditworthiness. A discriminatory appraisal that results in the denial of home financing may also violate the Equal Credit Opportunity Act of 1974, Section 1981 of the Civil Rights Act of 1866, and state and local laws. Unfortunately, though, not every person can afford a second appraisal if they feel they’ve been subject to discrimination – or afford to take related legal action. Cost for appraisals can average anywhere from $300-$800 for traditional, full-scale appraisals, so many cannot afford multiple appraisals.

And research shows that appraisal bias remains a persistent problem despite reforms. A December 2022 study by the Brookings Institution found that homes in majority-Black neighborhoods are around two times more likely to be appraised under the contract price than homes in majority-white neighborhoods The same study also found that homes in Black neighborhoods are valued roughly 21% to 23% below what their valuations would be in non-Black neighborhoods, resulting in $162 billion in cumulative losses for Black communities.

Moreover, a 2021 Freddie Mac study identified that Black and Latino applicants are more likely to receive appraisal values lower than the contract price than white applicants, even when controlling for structural and neighborhood characteristics. It also found that, alarmingly, a large portion of appraisers are generating these gaps in appraisal value, not just a small fraction of appraisers. And the problem appears to be worsening in recent years, rather than improving. In fact, racial inequality in appraised values has increased 75% over the last decade, the New York Times reported in November 2022.

Photo via Shutterstock
Photo via Shutterstock

How Can the Government and the Housing Industry Better Address Appraisal Bias?

New efforts are underway to combat appraisal bias. In June 2021, the Biden administration announced an Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) to tackle the problem of appraisal bias. The task force, comprised of 13 federal agencies, has developed a set of recommendations to combat racial and ethnic bias in home valuations. This is an important first step toward tacking this problem, as LDF emphasized in a March 2022 press release that came out when the PAVE action plan was announced. But, in order to root out appraisal bias, the government and housing industry must take further action.

The Need for Federal Oversight and Reform of the Appraisal Industry

Reforming the standards that govern appraisal practices in the United States is crucial for addressing appraisal bias. Any reform must start with the Appraisal Foundation, the private entity that currently writes and maintains the standards and qualifications for real estate appraisals through its congressionally-authorized Appraiser Standards Board and Appraiser Qualifications Board. These standards and qualifications are then adopted by states and carry the force of law. However, the Appraisal Foundation is closely tied to the appraisal industry and has also been slow to enact reforms. The Foundation should improve its governance structure to limit the influence of the appraisal industry in setting standards. And Congress should also consider legislation strengthening federal oversight authority by amending Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which empowered the Appraisal Foundation to set standards for the industry.

In addition, the Appraisal Foundation must revise its appraisal standards document – which guides appraisers in making their evaluations –  in order to identify fair housing risk and eliminate bias. For example, the Foundation’s appraisal standards allow appraisers broad discretion in the sales comparison approach, which can result in biased appraisals. The Appraisal Foundation, as well as lenders like Fannie Mae, Freddie Mac, and federal agencies that rely on appraisals, should explore alternative models of appraisals that limit fair housing risk and reduce appraisers’ discretion.

The Need for Improved Training and Increased Diversity Among Appraisers

Another key factor in addressing appraisal bias is fair housing training, which educates appraisers about the negative impacts of housing discrimination and their responsibilities in complying with fair housing laws. Half a dozen states — including New York, California, and Illinois — require fair housing training for appraisers. The Appraiser Qualifications Board recently proposed changes to their appraiser qualifications criteria that would require fair housing training for all appraisers as a condition of obtaining and maintaining appraiser credentials. These proposed changes should be finalized as soon as possible, and the Appraisal Foundation should release comprehensive fair housing training.

The private and public sectors must also work together to improve diversity among appraisers. Today, some 90% of U.S. appraisers are white and two-thirds are male, according to a March NPR report. Less than 1% of all appraisers are Black, per the same report. Municipalities like Philadelphia have tried to address appraisal bias by encouraging more diverse applicants to enter the profession. For example, in July 2022, a Philadelphia home appraisal bias task force recommended efforts to promote the appraisal profession as a career option for women and people of color pursuing degrees at local community colleges and universities. The task force has also recommended creating a workforce development pipeline program specifically targeted at “skilling up” those who want to become appraisers. The New York Mortgage Coalition, a nonprofit group of financial institutions and community housing agencies, also recently launched a program to cover the cost of appraisal training and materials for aspiring Black appraisers in the state. Other municipalities, states, and organizations should consider employing similar programs to encourage appraiser diversity.

Finally, the Appraisal Foundation should also comprehensively review the qualifications required for appraisers to enter into the profession in order to identify and reduce barriers to entry for people of color.

The Need for Housing Lenders to Help Combat Appraisal Bias

Housing lenders can also play an important role in helping eliminate discrimination in the housing industry. Appraisal bias violates fair housing and fair lending laws and increases the risks that mortgage lenders face under those laws. Lenders should carefully examine their policies and practices to identify ways to minimize these risks. For example, Fannie Mae and Freddie Mac should ensure that the Uniform Residential Appraisal Report reduces appraisers’ discretion and eliminates opportunities for biased appraisals. The Uniform Residential Appraisal Report is one of the most common forms employed in United States real estate appraisals and it’s used by appraisers to provide the lender or client with an accurate and adequately supported opinion of the market value of the property they are evaluating. Limiting bias can be done by updating industry norms on the type of neighborhood information that is appropriate on the Uniform Residential Appraisal Report and moving away from neighborhood descriptions that include the racial and ethnic composition of a neighborhood, which can infer bias. 

Similarly, the U.S. Department of Veterans’ Affairs (VA), which backs home loans for some veterans, should incorporate civil rights and consumer perspectives in its upcoming revisions to appraisal regulations and policies, and provide transparency regarding the VA’s standards for fair housing oversight and accountability mechanisms.

Automated Appraisals and the Need for Vigilance around Algorithmic Bias

Many people have proposed shifting from human appraisers to automated valuation models that rely on algorithms to determine the value of a home. Algorithmic bias against people of color, however, is a persistent and pervasive issue across industries. As LDF pointed out when submitting comments to the Federal Trade Commission on algorithmic bias in 2022, “… there are instances when [automated decision-making] systems are not only ineffective but also reproduce or exacerbate inequities, bias, and discrimination. [These systems] can exhibit algorithmic bias, creating unfair disadvantages for people of color and other protected classes.”

For example, automated valuation models may simply perpetuate a flawed appraisal approach based on data that perpetuates the undervaluation of formerly-redlined communities of color. Before this technology is used, it must be rigorously evaluated for algorithmic bias.

Photo circa 1955 by National Archives/Archive Photos/Getty Images
Photo by Amanda Andrade-Rhoades/For The Washington Post via Getty Images

Reform is Crucial to Prevent Further Discrimination in U.S. Housing Market

Federal, state, and local laws protect homeowners from discrimination in home appraisals. Yet appraisal bias remains a persistent problem, contributing to the growing Black-white racial wealth gap. The reforms discussed here, among others, would help address these issues.

The next piece of this series will discuss what readers can do if they think they have experienced appraisal bias and how they can advocate — as individuals and communities — to help combat appraisal bias. 

David Wheaton is an Economic Justice Policy Fellow at LDF whose portfolio includes fair housing work.

Published: May 19, 2023

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