The devaluation of housing in Black neighborhoods is a pressing issue that has far-reaching implications. Research has shown that homes in majority Black neighborhoods are undervalued, resulting in significant financial losses for homeowners. In fact, it is estimated that the losses amount to $48,000 per home and a cumulative total of $156 billion in majority Black neighborhoods.
Is it just class? A reply to critics
Critics of this research argue that the devaluation of housing in Black neighborhoods can be attributed to factors such as the buying power of neighborhood residents or the socio-economic status of the residents. However, extensive analysis has revealed that these factors alone do not fully explain the devaluation. When neighborhood median income and educational attainment are included in the model estimating price per square foot, the devaluation estimate only decreases from 23% to 22%. This indicates that there are other underlying factors at play that contribute to the devaluation.
Furthermore, when the preferred empirical strategy suggested by critics is followed, it actually results in even larger devaluation estimates than the published results. This suggests that their arguments regarding class and socio-economic status do not hold up under rigorous analysis. The evidence points to the presence of anti-Black racial discrimination as a significant factor in the devaluation of housing in Black neighborhoods.
New evidence on appraisals: One link in the chain of devaluation
Recent research conducted by economists and data scientists at Freddie Mac provides further evidence of racial discrimination in housing markets. Their analysis of more than 12 million appraisals revealed that homes located in majority Black and majority Latino or Hispanic neighborhoods are more likely to have appraisals submitted to Freddie Mac that are below the contract price compared to homes in majority white neighborhoods.
The research team found that the share of homes under-valued is 7.4% for homes in white neighborhoods, 12.5% in majority Black neighborhoods, and 15.5% in majority Latino or Hispanic neighborhoods. This provides concrete evidence of racial bias in the appraisal process, which contributes to the devaluation of homes in Black neighborhoods.
Discrimination generally and in housing markets
Discriminatory beliefs based on race are deeply ingrained in society and have significant economic consequences. Racism, both explicit and implicit, has historically played a role in determining the fitness of individuals for economic transactions. While public opinion regarding racial discrimination has improved over the years, evidence shows that discrimination persists in various forms.
In housing markets, discrimination by individual sellers, landlords, and real estate agents has declined but still exists, as evidenced by audit studies. Discrimination by lenders, on the other hand, continues to be prevalent and can be largely attributed to specific policies and practices within lending institutions. Discrimination in appraisals further exacerbates the devaluation of homes in Black neighborhoods.
How racial bias can devalue values in Black neighborhoods
The devaluation of homes in Black neighborhoods has a significant impact on the overall value of these neighborhoods. Racial bias in the appraisal process leads to homes being appraised below their contract price, forcing sellers to lower the final price. This, in turn, perpetuates the cycle of undervaluation in Black neighborhoods. Reforming the appraisal industry is crucial to address this issue and ensure that homes are accurately valued.
Where to go next
Further research is needed to gain a deeper understanding of discrimination in lending and underwriting processes. Additionally, exploring the pre-market factors that influence valuations, such as bias against neighborhoods by potential home buyers, would provide valuable insights. It is essential to create a comprehensive understanding of the true value stored in Black neighborhoods and pressure institutions to eliminate discrimination by making this data available to consumers.
In conclusion, the devaluation of housing in Black neighborhoods is a complex issue with multiple contributing factors, including racial bias in appraisals. Addressing this issue requires comprehensive reforms in the appraisal industry, as well as continued research to shed light on the extent and impact of discrimination in housing markets. Only through proactive measures and a deeper understanding can we work towards a more equitable future for all.