In a major shift, appraisal industry leaders have acknowledged bias in setting home values. Will it be enough to fix the problem?
News stories about racial discrimination in appraising home values have been piling up over the last several months, usually with a narrative like this one, reported Feb. 12 in San Francisco: A Black couple saw the appraisal of their home increase by $500,000 after they took down photos of themselves in the house and had a white friend pose on their behalf during the appraiser’s visit.
The lesson in these stories is that if you want to get a fair appraisal and maximum selling price potential for your home, you might need to pretend to be white. That kind of individual bias is just one part of a broader, systemic problem, called “appraisal discrimination” or the “racial appraisal gap.” It’s supported by a long span of research showing that homes in majority-Black neighborhoods have been severely undervalued for decades, widening the wealth gap between Black and white families.
Until recently, the leadership of the Appraisal Institute, an international professional association representing the real estate appraiser profession, was unwilling to acknowledge that this was even an issue. In 2019, when Congressman Al Green of Texas asked the leaders of several real estate professional organizations including the Appraisal Institute if they believed that “invidious discrimination plays a role in the devaluation of property” in Black neighborhoods, none of them raised their hand.
“When we look at neighborhoods, we look really at the market conditions in the neighborhood,” said then-president of the Appraisal Institute Jeff Sherman in an interview with Bloomberg CityLab last year. “We don’t look at race composition.”
Today, the organization’s tune has changed. Sherman is no longer president of the Appraisal Institute and the new president, Rodman Schley, has a new perspective on racial disparities: The institute is now willing to acknowledge that racial bias exists in the industry on some levels. The question looms, however, whether its proposed remedies will be sufficient for closing the appraisal gap.
The Appraisal Institute is currently taking several approaches to rooting out the problem, including ramping up training on unconscious racial bias, updating the industry’s professional ethics standards and expanding its diversity initiatives to bring more people of color into the field. The institute says it will also be reviewing studies on the topic and doing its own research on whether bias exists in the profession and where.
“One thing we are looking at is whether there is a better way of valuing property that maintains objectivity while not inadvertently introducing new problems for the very consumers for whom we’re trying to ensure equity,” said Schley in a statement to Bloomberg CityLab. He continued:
We also know bias is human and exists in various forms, and no profession is immune from that. Appraisal groups are working on equity, diversity and inclusion solutions alongside consumer groups, real estate brokers and agents, banks, government agencies and others. This is an absolute priority for the Appraisal Institute. In addition to looking at our processes and approaches, we’re reinforcing ethics, education and training, including developing an unconscious bias course. We’re working on recruiting more appraisers of color and women; we’re backing policy solutions that advance equity; and we’re ensuring consumers know their rights.
If the Institute takes all of these ideas seriously, it would be a major shift from the appraisal industry’s past approach to discrimination. But Schley’s public comments have stopped short of saying that racism in the industry is systemic. Several experts who have studied the appraisal gap say that to really reverse the current disparity, nothing less than a total overhaul of how appraisals are conducted may be required.
The science vs. the art
Jillian White, a Black appraiser, was assisting her aunt and uncle in refinancing their home loan several years ago when a realtor suggested that they take down family photos and other indications of Black home occupiers — “to erase themselves in the home,” says White — in order to get a higher appraisal. White initially balked at the suggestion, but eventually advised her family members to do it, out of a concern that they got what they deserved for the house. Years later, the issue came up again, this time with her parents who were looking to sell their home. White, again, reluctantly suggested that they commit the same erasure as her aunt and uncle, but her parents refused, telling her, “Let the chips fall where they may.”
When her parents got the appraisal report, White, a more seasoned appraiser by this time, immediately identified several flaws in it leading to what she believed was a “ridiculously low” appraisal of the home. So, she wrote a rebuttal, asking for a second opinion on the house — a request that is exceedingly rare, and is even rarer in terms of upward adjustments. The second appraisal came back with an additional $100,000 in value that the appraiser found in her parents’ home.
“I speak appraiser fluently, so I knew what points to push on,” said White about the rebuttal. “The revised appraised value came in at $100,000 higher, so it wasn’t a small difference. It was substantial. Now in the case of my parents, they didn’t need that higher valuation in order for their loan to go through. But really who among us can afford to miss out on a $100,000 valuation of their largest asset?”
White knew from other similar accounts that this wasn’t just happening to her family — she went to college with Abena Horton, the woman profiled in a New York Times story on appraisal discrimination. She also knew, from speaking with colleagues in her profession that this kind of bias seemed rampant. She points to one occasion when an appraiser she hadn’t met before shared in a phone conversation that he was once surprised when entering the home of an Irish-Italian family at how unkept the house was, and expressed shock at how neat and clean a Black woman’s house was. However, White doesn’t believe that appraisers are doing this to deliberately harm Black people and their properties.
“For me, it’s a really straightforward conversation: We all have bias. Given the history of this country, why wouldn’t there be racial bias in appraising, especially considering the demographics of the appraisal community?” says White. “What I think the appraiser community is hearing is bias equals racism and racism equals ‘I am a bad person.’ And so they are fighting tooth and nail just to not be considered bad people.”
At Better.com, a real estate company where White serves as head of the collateral department, she has been working on a study that identifies where exactly in the appraisal process the bias often surfaces, and how it can be ameliorated. A common refrain from the appraisal industry is that they don’t create home values themselves, they only reflect values based on the market — meaning, they don’t arbitrarily come up with prices on their own, but rather use set-in-stone pricing methods derived from factors such as consumer demand, “desirability” and amenities of the house itself.
That’s the “science” part of appraising, says White, but appraisers also have some discretion in how they determine value, because there is usually a range of prices they can pull from. For example, an extra wing added to a house could mean hypothetically somewhere between $10,000 and $20,000 in the valuation, but the appraiser determines whether it will be the lower or upper part of that range. This is the “art” of the deal, says White, and it’s usually where you’ll find questionable calculations.
“This idea that we’re just strictly reporting on the facts, that isn’t true, because if that were true you wouldn’t need appraisers,” says White. ”There would also be no difference in appraised values between different appraisers, because it’s all science. But that’s not the case. It’s the mix of science and artistry, and the artistry is where the unconscious bias comes in.”
“OK, we have a problem”
While the kind of behavior encountered by White and described in recent news stories tracks bias at the individual appraiser level, there is emerging evidence that the problem is systemic. Andre Perry, an African-American Brookings Institution research fellow, published a study in 2018 that found homes in majority-Black neighborhoods were undervalued by $48,000 on average compared with those in neighborhoods where fewer than 1% of the residents are Black. In September, Junia Howell, of the University of Pittsburgh, and Elizabeth Korver-Glenn, of the University of New Mexico, published another study that found that the difference in average home appraisals between neighborhoods that are majority-white and those that are majority-Black/Latinx has doubled since 1980. That’s not because of the work of a few bad apples in the industry, say Howell and Korver-Glenn. They found that the major culprit for this widening gap can be found in the formula that appraisers use today for pricing homes.
The sales comparison approach, the primary appraisal method used by real estate professionals for owner-occupied homes, requires appraisers to determine a home’s value based off the sale prices of similar homes in the same neighborhood. Because of racial segregation’s enduring effect of undervaluing Black neighborhoods, this approach has carried the legacy of artificially depreciated housing prices from the days of redlining into the present, while allowing for houses in white neighborhoods to appreciate over time. The appraisers’ current valuation processes have not only been exacerbating the racial appraisal gap, but also the racial wealth gap, given that homeownership is one of the primary ways that U.S. families accumulate wealth.
“It’s kind of shocking to look at the real numbers of average home values in white communities versus communities of color over the last 40 years, and see the two-fold and sometimes five-fold increase in white communities compared to communities of color,” says Howell. “What this means is even since the Fair Housing Act, where more people were able to get more mortgages, those living in Black, Latinx, indigenous and Asian communities have not had the same appreciation of their homes, meaning they have not benefitted from that wealth growth that their white counterparts have.”
Perry launched an initiative last month in January with the Brookings Institution and Ashoka that will award up to $1 million to the person or organization that can come up with innovative new alternatives for appraising homes that would produce racial equity.
It’s unclear whether the Appraisal Institute would be willing to adopt such an alternative method for conducting appraisals. Thus far, it has committed only to studying the issue to see if any corrections are needed on structural issues like the sales comparison approach. Meanwhile, it is hoping that investing heavily in diversifying the profession will yield better outcomes. It has partnered with the National Urban League and Fannie Mae to award scholarships for education courses to 14 students of color looking to join the appraisal profession.
“I don’t want to say they did a 180, because before they didn’t see it as a problem at all,” says Perry. “But now they’re actually acknowledging, OK, we have a problem. What I don’t want us to do, though, is say that the problem is rooted in individual appraisers. While that is true, there is a systemic nature to the problem, and we need to address that.
Whether racism is found at the individual level, system-wide, or both, the differences in appraisals could mean that Black homeowners have missed out on millions if not billions of dollars in wealth over the decades due to the undervaluing of their properties. In 2017 alone, according to Perry’s study, that amounted to $156 billion in lost equity for homeowners in Black neighborhoods. According to the study, that would have financed more than 4.4 million Black-owned businesses.
In a recent presentation Howell made before the Federal Reserve, she located the origin of the racialized devaluation of property in the very beginnings of the country’s founding, noting how white settlers of the 1600s deemed Indigenous-inhabited land as worthless until the settlers were able to claim dominion over it. Howell told the Federal Reserve bankers that the racial disparities seen today are the result of both individual appraiser racial bias and problematic systemic practices, along with a heavy dose of federally-generated economic incentives in the real estate industry that keep those practices in place.
To eradicate the racial discrimination in the system, Howell said that the appraisal industry may have to resort to automation, such as web apps and digital platforms that can perform valuations — a proposal that could threaten appraisers’ jobs. Truist Bank president Bill Rogers said during the convening that “many of her proposals are right at the center of the plate on changing the dynamics of the appraisal community.”
Among her other proposals, Howell called for financial redress for the decades that Black homeowners were shorted in their home valuations.
“Reparations are central,” Howell told CityLab. “However, we can’t go forward with just reparations because then we still have a broken system, and we also can’t go forward by just trying to fix the system and pretend history didn’t happen.”