Appraisal Valuation Gap for Homeowners in Minority Neighborhoods Studied

Freddie Mac has embarked on a comprehensive effort to better understand the key drivers contributing to the appraisal gap found in homes in Black and Latino neighborhoods.

It’s a situation that stretches back decades, at least as far as when baseball superstar Jackie Robinson tried to buy a home in the middle of the 20th century. Various studies and analysis have occurred since, resulting in mostly consistent findings.

“Our goal is to develop solutions to this persistent problem, including appraisal best practices, uniform standards for automated valuation models, enhanced consumer disclosures, improved value processes, and revised fair lending exam procedures and risk assessments,” Michael Bradley, senior vice president of modeling, econometrics, data science and analytics in Freddie Mac’s Single-Family division, said in a prepared statement.

Freddie Mac has released an analysis showing that appraisal values are more likely to fall below the contracted sale price of a home in census tracts with a higher share of Black and Latino households, resulting in an appraisal gap. 

The extent of that gap increases as the percentage of Black and Latino individuals in the census tract increases. The research is based on 12 million appraisals for purchase transactions submitted to Freddie Mac between 2015 and 2020 through the Uniform Collateral Data Portal.

“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,” Bradley said. 

Structural Inequity and Internal Bias the Culprits

Broadly, the appraisal gap comes from two major sources: structural inequities Black people face in the real estate industry and internal bias on the part of appraisers, writes Zach Wichter of Bankrate.

Robinson broke through Major League Baseball’s color barrier in the 1940s, “but his family never cracked the Westchester County housing market,” wrote the Rockland/Westchester Journal News in 2019.

Robinson, whose memory is celebrated every April on the anniversary of his first game in MLB, had tried to move to Westchester from the city with his family in the 1950s. Robinson and his wife Rachel faced redlining in seeking a home in the county and across the border in Fairfield County, Conn., according to a 2016 TV series by director Ken Burns.

Appraisal Industry Broadly Drives Gap

Following are research highlights presented by Freddie Mac:

• The appraisal gaps identified are not being driven by only a small fraction of appraisers — a large portion of appraisers who completed appraisals in both minority and non-minority areas generated statistically significant gaps. 
• Properties in Black and Latino tracts receive appraisal values lower than the contract price more often than those in White tracts — 12.5% of the properties in Black tracts receive appraisal values lower than the contract price compared to 7.4% for those in White tracts, leading to a gap of 5.2%. 
• As the concentration of Black or Latino individuals in a census tract increases, the appraisal gap increases. For example, as the population of Latino individuals increases, the appraisal gap for properties in Latino tracts increases from 7.7% to 9.4%.
• Differences in comparable sale distances, comparable reconciliation, variances in comparable sale prices and possible systematic overpayment for properties by minorities can explain only a modest amount of the observed appraisal gaps for the minority tracts.

Analysis was conducted on appraisals for the purchase of a single family one-unit home. Numerous robustness checks from different perspectives were conducted as part of the analysis, including by appraisal type, occupancy type, property condition, housing trend indicated in the appraisal report and by urbanization level. In addition, analysis was conducted on the top 30 Metropolitan Statistical Areas. The patterns observed based on the aggregate national data mostly persist; thus, the appraisal gaps seem pervasive.

“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,” Pamela Perry, single-family vice president of equitable housing at Freddie Mac, said in a release.

“We are committed to engaging with the Appraisal Institute to review the analysis in depth so that we can work together in identifying causes and solutions.”