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New Data Set Helps Researchers Identify Racial Bias in Real Estate Appraisals

There has long been anecdotal evidence of racial bias when it comes to real estate appraisals. Numerous stories have been published about black homeowners finding their houses appraised for more after they spoofed that a white family was living there. But up until recently, there was no concrete, statistically significant evidence of this bias. That all changed in June of 2021 when President Biden’s administration announced the creation of the Property Appraisal and Valuation Equity taskforce, or PAVE, “an inter-organizational task force on property appraisal and valuation equity.” After hearing from researchers and advocates who struggled to understand the extent of racial bias in the appraisal industry, PAVE has made public a standardized data set with comprehensive appraisal information from both Fannie Mae and Freddie Mac dating back to 2013. 

With this data, researchers at the University of Illinois Chicago and Washington University in St. Louis conducted their recent research that identified connections between the appraisal value of buildings and the neighborhood’s racial makeup. The first big finding was that houses in neighborhoods with predominantly black or POC residents only appraised for half of what the same house would appraise for in a predominantly white neighborhood. These inequalities prove to be worst in American Indian, Alaska Native, Southeast Asian, and Pacific Islander communities. 

The research also suggests that the bias is getting worse despite technological advancements in the appraisal process. Inequitable appraisal value has increased over 75 percent in the last decade and was exacerbated during the pandemic, especially in the hottest housing markets.

I reached out to one of the researchers, Dr. Junia Howell, to get a sense of what they found and, more importantly, what they think could be done to reverse this trend. “Elizabeth Korver-Glenn [the report’s co-author] and I began researching racial inequality in appraisals nearly a decade ago,” she said. “Having spent almost a decade wanting to analyze the data we made it a priority to do as soon as possible.”

Part of the problem, Dr. Howell found, is the appraisal process itself. Homes are valued based on other “comparable” houses that were recently sold in a certain radius around the property. This generally compounds racially biased appraisals since most minority groups live in close proximity to each other. While it might be hard to eliminate the comparable process that the appraisal industry has used for over half a century, Dr. Howell thinks that some things can be done to improve it.

The first is standardizing neighborhood or market boundaries. Since neighborhoods are often not defined by a certain zip code or census bureau tract, clear neighborhood boundaries need to be established to help reduce the possibility of comparable properties only being chosen from racially similar neighborhoods. Another problem is how the price is adjusted based on the physical attributes of the house compared to similar properties. Because there is no standard amount that should be added or subtracted for each attribute, appraisers can effectively use these adjustments to inflate or deflate valuations unfairly. Another suggestion of the research is to systemize the adjustment process to make it less subjective.

One of the most interesting changes to the current appraisal process suggested by the researchers is to force appraisers to select comps from racially diverse areas. “Intentionally selecting comps from racially disparate areas to adjudicate for past redlining practices,” Dr. Howell said. The appraisal industry has a long way to go to reverse a long history of redlining neighborhoods at the expense of minority homeowners, but this could be one way to start.

Changing the way that we appraise property value can certainly help bridge the valuation gap between white and black neighborhoods, but Dr. Howell envisions an entirely different approach that could eliminate racial bias altogether. “I am currently working on the lifespan approach, which is a component-based method that employs object identification and machine learning to estimate original cost and depreciated values,” she said. “This approach removes speculative land investment and focuses on the use of property for housing communities.” Focusing on the value a house has for providing shelter for its owners, rather than factoring in what investors might have been willing to pay for it, is a major shift in the way we think about real estate valuation and would likely take some convincing before the property industry would adopt en masse.

The new data set might have helped expose a racial bias in the property industry, but this inequality is only a symptom of a larger problem. People of color have been stripped of many of the financial benefits of owning property at a devastating cost. Recent research shows that white Americans average 7.8 times more savings than black Americans. To make up for decades of inequality, governments should look for ways to encourage homeownership in communities of color. A few suggestions from Dr. Howell include tax credits or stimulus packages that help minority homeowners. 

Another idea is to create variable interest rates that could adjust based on the situation of the borrower. “Like progressive taxes, progressive interest rates set lower interest rates for those with less wealth and/or who have been personally negatively influenced by racist housing evaluation processes,” Dr. Howell said. “Rather than setting one interest rate, the Federal Reserve could set different rates based on set criteria enabling lenders to provide capital with less interest for those who have been historically shut out of wealth appreciation.”

There will undoubtedly be pushback against any changes proposed to how property is valued. The almost ten billion-dollar appraisal industry has been working off the same basic principles for as long as anyone can remember. But this change, no matter how hard, is needed. Americans have amassed a huge amount of wealth thanks to property ownership, but this wealth has largely excluded racial minorities. Suppose we want a country that acts upon its values of equality. In that case, we must find ways to level the playing field and help people of color receive the same benefits of property ownership that white homeowners have been benefiting from for decades.

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