Housing discrimination and racial bias have taken many forms over the years, from the explicit government-sponsored policy of redlining (refusing to insure mortgages in predominately Black neighborhoods) to the continued practices of steering (real estate agents pushing Black homebuyers away from white neighborhoods).
Yesterday, Freddie Mac released a new report exploring another avenue that the real estate industry has discriminated against non-white homeowners—through appraisals.
According to the report, the appraisal value of homes in predominantly Black and Latino neighborhoods were significantly more likely to appraise lower than the contracted sale price compared to white neighborhoods, a disparity that cannot be explained by comparable reconciliation, variances in comparable sale prices or possible systematic overpayment.
Homes in Black neighborhoods are about 70% more likely to appraise lower than the sales price compared to homes in white neighborhoods—12.5% compared to 7.4%. Homes in Latino neighborhoods were more than twice as likely to appraise lower, the data showed, at 15.4%.
“This is a persistent problem that disproportionately impacts hundreds of thousands of Black and Latino applicants,” said Michael Bradley, senior vice president in Freddie Mac’s single-family division, in a statement. “Our research marks the beginning of a comprehensive effort to better understand the key drivers contributing to the appraisal gap.”
The racial gap still exists when controlling for other property and neighborhood characteristics, the report stated. Bradley said it is possible this gap is contributing to continued racial disparities in homeownership and equity.
“An appraisal falling below the contracted sale price may allow a buyer to renegotiate
with a seller, but it could also mean families might miss out on the full wealth-building
benefits of homeownership or may be unable to get the financing needed to achieve the
American Dream in the first place.”
The report explored potential reasons for this gap, using an in-house appraiser and experts as well as ancillary data. Overall, appraisers used a smaller distance for comps when working in Black and Latino neighborhoods, according to the report, and were also reconciled toward the lower end of the comp scale in those neighborhoods to a small degree.
A higher concentration of Black or Latino residents increased the appraisal gap, the data also showed. The report also noted that statistics originated from appraisals nationwide, making the racial gap “pervasive.”
According to the report, Freddie Mac is looking at “supporting tools” that can serve as “alternatives to traditional appraisals” in order to combat the apparent racial biases in the industry.
“Equity in housing is a critical issue and one Freddie Mac takes very seriously,” said
Pamela Perry, single-family vice president of equitable housing at Freddie Mac, in a statement. “We’re uniquely positioned to investigate potential gaps and provide data-driven research like this to advance solutions that promote equity across the valuation process.”
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news ideas to jwilliams@rismedia.com.
