Residential Magazine

Unequal Opportunity

Addressing appraisal bias is another step toward making housing more equitable

By Marisa Calderon

Homeownership has long been synonymous with the American dream, in no small part due to its promise of financial freedom for people of every background through the wealth-building potential of home equity. That’s not to mention the many other recognized advantages of owning a home.

This was certainly the case for countless white families in post- World War II America, when the U.S. government made bold steps to support homeownership through the GI Bill. Before that, the government addressed these issues through housing programs started under the New Deal.

Many news stories tend to focus on the potential for an individual appraiser delivering a too-low estimate based on factors associated with the occupants instead of the home. But the reality is more nuanced.

These programs were designed to address an acute housing shortage by providing affordable homeownership opportunities for American families. Unfortunately, they also resulted in a disproportionate benefit to white families and furthered neighborhood segregation under policies referred to as redlining.
It should therefore come as no surprise that nearly every component of the housing and housing finance ecosystems has been impacted in some way by — at a minimum — the past 90 years of legislated unequal access to opportunity. While Americans have inherited a complicated physical and social infrastructure, the challenge of addressing historic inequities and making good on the promise of the American dream for everyone is a worthwhile endeavor.

Nuanced reality

Buying a home is one of the most significant purchases most people will make in their lifetime, and it’s also one of the most complex. As a first-time buyer, unless you are among the 6% who purchase their homes entirely with cash, you are likely financing the transaction and your mortgage lender will require an appraisal.
The potential for appraisal bias in home valuation has recently garnered public attention and regulatory scrutiny. Many news stories tend to focus on the potential for an individual appraiser delivering a too-low estimate based on factors associated with the occupants instead of the home. But the reality is more nuanced.

The appraiser profession needs greater diversity, allowing those involved in the process to reflect the diverse communities they serve.

To arrive at a home’s value, a qualified appraiser traditionally performs an in-person inspection to assess things like amenities and conditions, then uses this information along with an analysis of comparable nearby home sales. Appraisers are trained to provide an objective, unbiased analysis, but they also must rely upon data and methodologies that have been impacted by the systemic racism of redlining.
The appraisal industry also is incredibly analog, so typical tools of the trade include clipboards, tape measures and pencils for capturing information to manually input into a computer back at the office. New technology has emerged to help appraisers digitize the collection of data and respond to a changing regulatory environment.

Regulatory scrutiny

For the past few years — and amid movements around social injustice — conversations on the issue of bias in the appraisal process have been increasingly taking the spotlight as more homeowners stand up to tell their stories. While the issue of bias in the appraisal process is not new, the regulatory scrutiny and efforts to address underlying systemic reasons are just now coming to bear.
As the topic gains momentum, appraisers are often in a defensive stance while researchers continue to shed light on appraisal bias — be it systemic, implicit or explicit. Incidents such as an extremely inflammatory email from an appraiser to a researcher are catching the attention of lawmakers like Rep. Maxine Waters, who chairs the House Financial Services Committee. Waters and others are seeking legislative changes to address systemic appraisal discrimination.
She is not alone in addressing bias in appraisals and housing. Last year, President Joe Biden established the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which delivered an action report in early 2022 that described the extent, causes and consequences of misevaluation and undervaluation of properties. The task force also proposed a set of policy changes to advance racial equity in the appraisal process.

Troubling research

The government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae have released research addressing the existence of substantial appraisal gaps. Freddie Mac’s analysis of 12 million appraisals found specific appraisal gaps related to both place (census tract) and people (race/ethnicity).
Compared to homes in white-majority census tracts, those in Latino- dominant neighborhoods were twice as likely to have an appraisal gap between the contract price and the appraised value. The gap between white and Black neighborhoods was only slightly lower. Freddie Mac’s researchers also reviewed demographic data provided by the homebuyer on their mortgage application and noted an appraisal gap of 2.9 percentage points for Latinos and 2.1 points for Blacks.
Fannie Mae’s analysis of 1.8 million appraisals found distinct but inter- related valuation issues specific to Black and white borrowers. On average, Black borrowers refinancing their homes received slightly lower values relative to an automated valuation model (AVM).
In addition, homes owned by white borrowers were more frequently overvalued compared to an AVM. A high concentration in six states — Georgia, Louisiana, South Carolina, North Carolina, Mississippi and Alabama — accounted for nearly 50% of the overvalued homes owned by whites in majority- Black neighborhoods.

Collaborative solutions

With plenty of research to illustrate a consistent set of problems, it is up to key industry players to collaboratively focus on solutions. This includes the GSEs, which have taken a couple of important steps this year by accelerating modern appraisal programs and allowing for desktop appraisals that forgo the need for an appraiser to physically enter a home.
These programs also offer the benefits of faster turnaround times and reduced costs to the borrower. The desktop appraisal option via Fannie and Freddie is one of the most recent mortgage finance innovations in an industry where fax machines and in-person notarization are still de rigueur. A desktop appraisal uses third-party data available through tax records and multiple listing services in place of an in-person property evaluation.
Desktop appraisals provide one potential means of addressing explicit bias by eliminating an appraiser’s in-person inspection of a home — where they can’t see or be influenced by the owner’s or buyer’s race or ethnicity. But they aren’t a panacea since there would still need to be a mechanism to identify value differences for homes in disrepair or ones that have been heavily upgraded, and they are limited to purchase loans.
In an industry that currently requires thousands of hours of supervision before you can become a certified appraiser, desktop appraisals offer a career path that can attract a more diverse talent pool — especially given the rise of work-from-home options in this competitive job market. The GSEs have taken immediate steps to partner with the National Urban League, Appraisal Institute and others to increase diversity in the profession. The intention is to have the appraisal profession better reflect the communities it serves.

Technological advances

In 2021, 97.7% of all property appraisers and assessors were white. Absent intervention, there is a high likelihood of continued lack of diversity in the appraisal profession, which is responsible for evaluating the single-largest asset of the diverse population driving the country’s homeownership growth.
Proactive appraisal management companies are focused on increasing diversity through trainee programs and efforts such as Practical Applications of Real Estate Appraisal, which uses technology-based virtual training to disrupt the industry’s supervisor-trainee model. This long-standing mentorship model is often criticized for reinforcing inherent bias since it mainly involves white appraisers, who supervise trainees who are often close friends or family members.
Technology-enabled appraisal management companies also are investing in appraisal modernization initiatives to digitize and standardize the data collection process, which can increase accuracy while providing more transparency to the borrower about how the home was evaluated. The GSEs’ hybrid appraisal programs require mobile apps to be used on-site to capture property data, as well as automated digital floor-plan technology to measure the home consistently. These tools allow data collectors to visit the home and bring back objective data to an appraiser at their desk, again providing additional anonymity about the demographics of the borrower.

Greater diversity

The U.S. demographic shift has been underway for some time now with minority populations, driven largely by Latinos, accounting for more than half of the country’s population growth over the past decade. As the racial and ethnic makeup of the U.S. continues to change and communities of color account for a larger share of homebuyers, housing industry advocates and participants play critical roles in eliminating potential bias in the purchase process.
Every homeowner deserves a credible, unbiased opinion of their property value regardless of their race, color, religion, gender, gender identification or any other inherent factor. The intent of the independent appraiser model and regulated standard is to deliver an unbiased opinion of value, and most appraisers take the requirement to remain unbiased seriously and with great pride.
Still, the appraiser profession needs greater diversity, allowing those involved in the process to reflect the diverse communities they serve. The path to becoming an appraiser must avoid unnecessary barriers to entry and must allow new generations of appraisers to begin practicing in an abbreviated time frame.
To leverage the potential benefits of appraisal modernization, the physical characteristics of properties should be accurate, digitized, standardized and democratized so all relevant parties can easily and consistently verify and analyze information. While there is still much to do to address these long-standing issues of bias and discrimination, the initial steps within the industry are an encouraging start. ●


  • Marisa Calderon

    Marisa Calderon is chief of community finance and mobility at the National Community Reinvestment Coalition (NCRC) and is executive director of the NCRC Community Development Fund, a nonprofit community development financial institution named to Fast Company’s list of The World’s Most Innovative Companies of 2022. Calderon is an experienced executive who has been recognized, awarded and cited nationwide for her expertise in the housing and financial-services industries. She has more than two decades of experience dedicated to addressing issues of economic mobility and bridging America’s racial wealth gap.

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