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Racial Bias in Real Estate—Is It the Appraiser’s Fault?
by Maureen Sweeney, SRA, AI-RRS
In the past year, appraisers have been under attack for “racial bias” when providing appraisal services to lenders for home mortgages. Let’s take a closer look.
A licensed real estate appraiser is expected to perform valuation services competently and in a manner that is independent, impartial and objective. Like doctors in the medical, dental, and veterinary fields, real property appraisers are licensed by the individual states where they practice. Real property appraisers are also regulated by the federal government as a result of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), enacted in 1989 in response to the savings and loan crisis of the late 1980s. Appraisers who develop appraisal reports for federally related transactions must be licensed. An example of a federally related transaction is a home mortgage.
If a real property appraiser violates professional standards or the rules and laws governing their license, they can be fined, as well as having their license suspended or revoked. Appraisers collect the data, verify the data from reliable sources, analyze the data, and accurately report the conclusions. If real property appraisers neglect to do this, we can be fined, disciplined, lose our license or go to jail.
In the 32 years since Congress charged the appraisal profession with protecting the public trust, I know of no discipline against an individual appraiser that was based solely on racial bias. If appraisal assignment results were based on any bias, including gender, sex, sexual orientation, race, age, mental or physical impairment, or any other protected population, the appraiser who developed that report would be in violation of national and state fair housing laws, appraiser licensing laws, and the clear standards of valuation practice. That appraiser should and must be subjected to peer review and regulatory oversight—and suffer the disciplinary consequences.
Licensed appraisers must follow the law, which includes not performing an assignment with bias. Bias is defined as “a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment.” If an appraiser has bias towards socioeconomic status, race, religion, nationality, gender, sex, age, weight, mental or physical disorders or disabilities, or anything else, the appraiser must withdraw from the assignment. If real property appraisers neglect to do this, we can be fined, disciplined, lose our license, or go to jail.
Appraiser’s Job
The appraiser is central to the checks and balances in the home lending system. The appraiser is hired by the lender to ensure that there is adequate value in the property being used as collateral by the lender to provide funds to the borrower. The licensed broker/agent negotiates the price of the property, but they are not qualified or licensed to estimate the value. Providing valuation services is the job of the appraisal professional. The appraisal professional provides checks and balances in the housing system, as the appraiser has no financial interest in the amount or success of the transaction.
Appraisers reflect the market; we do not create it. This may cause some to get angry, especially when their commission is at stake or a homeowner cannot get a home equity loan to update their kitchen or repair the roof. The lender may have reasons to reject a mortgage application that have nothing to do with the appraised value of the property. The borrower may not qualify for the loan, they may have a low credit score, or they have a job that does not pay enough to cover the loan. Because the appraiser is typically the only party in the mortgage process who meets the homeowner in person, the appraiser may become the sole target of the homeowner’s disappointment, even if the reason for rejection of a loan has nothing to do with the market value of the property.
The Critics
In their research article Neighborhoods, Race, and the Twenty-first-century Housing Appraisal Industry, two academics making bias claims against appraisers, Dr. Junia Howell and Dr. Elizabeth Korver-Glenn, identify that “all appraisers complied with a uniform definition of market value that specified that appraisal values should be ‘the most probable price’ in an open and fair sale.” A fair sale means that buyer and seller are each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Howell and Korver-Glenn use “predicted values” to validate their findings. Predicted values are constructed by assigning a chosen value to each explanatory variable in their study. They conclude a predicted value of $479,000 for properties located in neighborhoods where there are higher quality public schools, lower crime rates, more accessibility to public parks, and more convenient to public transportation and employment. Properties located in neighborhoods that have poor or no public schools, high crime rates, no access to public parks, no access to public transportation, and limited employment options or opportunities had concluded predicted values of $58,000 and $65,000.
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According to their data, buyers pay more to live in one neighborhood than another. Howell and Korver-Glenn showed through their data and the use of predicted values that the most probable price in an open and fair sale is more for properties in locations that have greater neighborhood amenities and less for properties in locations that have limited neighborhood amenities. As an appraiser, I agree with this conclusion and so does the open market.
In their 2018 report, The Devaluation of Assets in Black Neighborhoods, The Case of Residential Properties, authors Andre Perry, Jonathan Rothwell and David Harshbarger also claim racial inequities within the housing market. This study also uses market value. It examines components of neighborhoods and locations including access to schools, the quality of the schools, access to businesses, including stores, restaurants, and other goods and service providers, walkability, crime, income mobility, household income, and educational attainment. This study uses regression analysis to predict home values. They found that violent crime predicts significantly lower property values. They also found that school quality, the number of gas stations, and access to public transportation affect value. In areas where school performance is weaker, commute times are longer and access to business amenities is more limited, the value of housing is less than in locations that have high performing schools, short commute times, and ample access to businesses. I agree with this conclusion also, and so does the open market.
In their study Howell and Korver-Glenn investigate whether racial inequality persists in the contemporary appraisal industry and, if present, how it happens. Howell and Korver-Glenn’s search criteria was single family houses in various census tracts areas in Harris County, TX in 2015. They use the terms value and price interchangeably and conclude that the market value (“the most probable selling price”) in one area with better schools and less crime has higher value than properties in another area with poor performing schools and greater crime. However, the Howell-Korver-Glenn report as well as Perry-Rothwell-Harshbarger conclude this was based on race, and it was the fault of the appraiser, rather than the result of the open market.
They ignored their own data and conclusions on the market value, which reflect the decisions and behaviors of knowledgeable buyers and sellers who are typically motivated, well informed, or well advised, and acting in their own best interests. Their conclusions mirror the conclusions of the various appraisers they studied: the likely selling price would be less in one location than in another.
Like the results of these various studies, appraisers reflect the market—we do not create it. It is my hope that researchers, journalists, government officials, and the public come to clearly understand the vital role appraisers have in society. The systematic practice of redlining—bias in the approval or rejection of loans, the lack of quality public education, lack of affordable insurance and unfair property taxation are not caused by the appraiser.
The appraiser must be independent, impartial, and objective. In a mortgage transaction the appraiser evaluates the property that is to be used as collateral in a mortgage finance transaction. The appraisal is provided to the lender, who uses the appraisal as one of the many criteria to underwrite the loan to determine if it will be funded or not. Contrary to what some believe, the appraiser does not make underwriting or lending decisions.
Discrimination is a multi-layered, multi-cultural and multi-generational issue. The systematic, historic, and institutional causes of the various business and government policies and practices need to be addressed and cured. We do not blame the doctor for a cancer diagnosis. Why is the appraiser blamed for reporting on the real estate market?
About the Author
Maureen Sweeney, SRA, AI-RRS, has been a residential real estate appraiser since 1989. From 2005 through 2017, she served as an Illinois Real Estate Appraisal Board member. Maureen is a national instructor with the Appraisal Institute and is the author of “The Valuation of Condominiums, Cooperatives, and PUDs” and the developer of their online and in-class 7-hour seminar, “Appraising Condos, Co-ops, and PUDs.” She is an AQB Certified USPAP Instructor and resides in Chicago, Illinois.
Mass Appraising
Is there reliable data that indicates there is a problem with unfair taxing by practitioners in the mass appraisal and assessment specialty? Yes. The Chicago Tribune did a fantastic job investigating, verifying, and reporting of the unfair taxing in 2017 in their four-part series, The Tax Divide: How flaws in Cook County property tax assessments harmed the poor and helped the rich. The assessor who was the subject of this investigation, Joe Berrios, was defeated in the March 20, 2018, Democratic primary election for Cook County Assessor, conceding to Fritz Kaegi, who went on to win the general election. Assessor Kaegi is working to shift the unfair tax burden from poor neighborhoods to wealthy neighborhoods and from homeowners to businesses.
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by Andy Arledge
good job Mo, finally someone that digs deep enough in these studies to find the truth, rather than the blame game.
i’ve been saying since all of this came out, appraisers reflect historical sales in their reports. BUYERS are the one discriminating, by chosing what neighborhoods they want to live in and what they are willing to pay.
-by Gavin Graham
Well said Maureen. Location, location. Does a homeowner complain when you reduce their value for fronting a busy commercial street? No. They are fully aware it has an impact. Remember who they blamed for the last recession? When homes depreciated by 40-50%? The appraisers. We caused the spike in prices over the prior 5 years. It’s what the media said time and time again, so of course, I heard it also from many homeowners. Did the appraisers do it? No. It was the banking industry who would give any loan to any living person if they “said” they could repay it. What happened to the banks? They got free loans from the government. I’ve been at this 35 years. We are often the punching bag since we have no voice. We are weak as a collective.
-by DAVID TAYLOR
Really? “Studies” to figure out that buyer’s want a better overall neighborhood and are willing to pay more for it. I could have saved them some time to tell them, Yes, they do! Doesn’t take a rocket scientist to figure that out. After appraising for over 30 years in a very racially diverse area, I have seen this many times where a simple elementary school district can make a big difference. I have pulled comps that at first did not make a lot of sense as to the wide ranges, until I looked at the school district boundaries. In one particular area that I appraise in which is about 90% white, there is one school that everyone wants their children to go to and it is evident in the sales with race having nothing to do with it. That’s a fun one when I have to explain, which I do in the report, why I did not use a comp that is closer, but not in that district. I always tell people, I do not appraise your house, your neighbors do!
-by Mary T Thompson
100% Agree Maureen with all you have stated. Now here is tough question that these people who want to blame the Appraisers need to be asking. WHY do the BUYERS pay more or less for various neighborhoods. What part does the REALTOR play in advising these buyers about certain neighborhoods and is that a BIAS transferred to the Buyers? The truth is Appraisers do not care at ALL who owns the property or where it is located, but guess what the BUYERS do and why is that? As your article intimated there are many other underlying issues involved which have nothing to do with the Appraisal Process. What do we stand to gain by low balling homes in certain neighborhoods? We have plenty of data that will support market reaction. The Authors of these studies have concluded the same thing Appraisers have by reporting the actions of the Buyers! YES, that is how it should be done! They need to get a clue as to how our process works and deal with the very real and serious underlying issues that drive Buyers decisions.
-by Paul Lorenzen
Since the authors of the study who claim racial bias used the identical data in their “predictions” of value that they claim appraisers used, it is equally fair to say that the authors of that study are racially biased in the same manner as the appraisers they claim are biased. The pot calling the kettle black!! Remember . . . figures do not lie, but liars figure!!
-by dale+bailey
Thanks so much Maureen! Of course I am the choir you are speaking to. With this simple message you have provided, if we had ONE VOICE, to take this message as our Mantra, we might have a chance to meet our challenge of future dis-assembling of the appraisal process and raising societies view that we have the publics trust. That in itself has been ruined at this time.
-by Tom
So well written and so true. The safest position for an appraiser who has to deal with the appearance of racial bias is to turn down the appraisal request. It would appear that the government and the book authors want the appraiser to violate USPSP. My license is more valuable to me than that so I would have, in good conscience turn down the request.
-by Michael G.
Thank you for being a voice of reason against a narrative that seems to be pushed almost daily. Your homes value is ultimately a function of location, location, location, and that’s what appraisers focus on. I have completed assignments that cover the entire human color wheel and not once in 30+ years have those elements ever been a factor, I seriously doubt I am alone in that fact.
Where is the evidence of this systemic problem?
-by Brad Bassi, SRA
Ms Sweeney, fantastic article and well said. I have been steaming over the blind side runaway train that has been politically motivated, as best I can see on this issue of racial bias. Congratulations on writing a well written and quality researched article. But I bet this doesn’t get picked up in the LA Times, NY Times, Washington Post or National media. Appraisal Institute better pick this up and run with it hard. JOB WELL DONE.
-by Wayne Calvelo
Your article point out a lot of good facts about our industry however there not worried about facts anymore. There is a push to make everything racist and now there here in the appraisal industry. Next is when homeowner’s start complaining that there value is low because there a minority
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