Racial bias in home appraisals has a detrimental impact on the devaluation of homes in majority-Black neighborhoods. This not only limits wealth accumulation for homeowners but also hampers the overall housing market in Black communities. While appraisal bias is a significant factor, it does not solely account for the devaluation observed. Other factors such as lending practices and consumer bias also contribute to the lower home values in these neighborhoods.
Understanding Devaluation
Previous research has shown that homes in majority-Black neighborhoods are consistently undervalued compared to similar homes in neighborhoods with fewer Black residents. Even after considering important buyer factors like age, size, proximity to amenities, and crime rates, homes in Black neighborhoods are still valued approximately 23% lower. This suggests that racial bias may play a part in the appraisal process.
New Data on Appraisal Bias
The U.S. Federal Housing Finance Agency (FHFA) recently released a comprehensive database called the Uniform Appraisal Dataset (UAD). This dataset provides valuable insights into appraisal bias by analyzing approximately 46 million final appraisals for single-family homes in different census tracts (or neighborhoods). By comparing the appraised value to the contract price, we can evaluate any potential bias in appraisals.
Analyzing the UAD data, we find that homes in majority-Black neighborhoods are about 6 percentage points more likely to be under-appraised relative to the contract price compared to homes in neighborhoods with a Black population share of less than 1%. However, it's important to note that this analysis only reveals the direction of bias and not the extent of under-valuation.
Estimating Lost Appraisal Value
To understand the financial impact of appraisal bias, we combined the UAD data with sales data from Redfin, a national real estate brokerage. This analysis revealed a significant negative effect of Black population shares on the median appraisal value. Homes in majority-Black neighborhoods receive a median appraisal value 15.2% lower than what sales prices would predict, even after controlling for other factors.
Re-Estimating the Devaluation
Appraisals below the contract price can have significant effects on the housing market. Research suggests that under-appraisal reduces a home's value by around 3.5% in large metropolitan areas. Our findings align with this, showing that a standard deviation in the share of properties undervalued below the contract price predicts a 4.5% lower price per square foot. In majority-Black neighborhoods, under-appraisal bias results in a 3.3% reduction in the sales price per square foot.
Taking these estimates into account, we can determine that appraisal bias explains roughly 15% to 19% of the overall devaluation in Black neighborhoods. However, it is crucial to acknowledge that racism and discrimination persist in various forms within the housing market, contributing to lower appraisals in majority-Black neighborhoods.
It is clear that addressing appraisal bias is essential. Nevertheless, we must also address systemic biases and discriminatory practices that hinder the fair valuation and demand for homes in majority-Black neighborhoods. By working towards a more equitable housing market, we can foster thriving communities and ensure the accumulation of wealth for all homeowners, regardless of their neighborhood's racial composition.
Addressing appraisal bias is a crucial step towards achieving equity in the housing market. By recognizing and combatting these biases, we can create a fairer and more inclusive environment for all homeowners.