Appraisers Consistently Undervalue These Homes

It's difficult to build generational wealth when a biased system is erecting roadblocks.

Pew Research findings indicate that 80% of Americans believe there is racial discrimination in the U.S. These findings are borne out across the board, impacting everything from schools to home values.

Here, we examine which neighborhoods are hit hardest by what appears to be racial bias.

Bias by the numbers

Last September, Freddie Mac released a comprehensive study of the U.S. home appraisal industry. They found that homes located in predominantly Black, Latino, or Hispanic neighborhoods are more likely than homes in white neighborhoods to be valued below the price offered by a buyer.

During the same month that Freddie Mac released its study, the White House announced that home prices had increased nationwide by 18.6% in 12 months.

How it plays out

Let's say someone wanted to sell their home in September 2021. One year earlier, it was worth $200,000, but due the increase in home values, it was now worth nearly $238,000. Due to how few homes were on the market, a bidding war ensued, with the winning bidder offering $250,000 for the home. The buyer is taking out a mortgage on the home, meaning an appraisal is necessary.

What Freddie Mac found was that appraisers routinely appraise property in predominantly white neighborhoods for at least much as the buyer offered. The same is not true in predominantly Black or Hispanic neighborhoods. It's far more likely that appraisals in those neighborhoods will come in under the price offered by a buyer. And because banks won't loan more than a home appraises for, and since many home buyers don't have the cash to make up the difference, homeowners in minority neighborhoods have had to settle for less.

The reality for minority home buyers and sellers

Most Americans depend on rising home values to help build generational wealth. The reality is, some face an uphill battle. Here are some of the reasons why:

• Anyone hoping to buy in a predominantly Black or Hispanic neighborhood cannot expect their home appraisal to come in at asking price, meaning they'll have to scramble to figure out how to make up the difference. If they can't make up the difference, the seller must decide whether to accept a lower price for the property.
• 50% of white home buyers who qualify for a mortgage do so with a co-applicant. That means they have someone to help them pay the mortgage. 70% of Black buyers do not have a co-applicant, putting the entire burden of homeownership on the buyer alone. Home value makes up an important portion of their overall financial well-being.
• Each time an appraiser comes in with a low appraisal, the value of the entire neighborhood is impacted. Lower appraisals make it more difficult for homeowners to build equity they can borrow against to make home improvements, further continuing the cycle.
• Lower home values lead to a lower property tax base. A lower tax base means less money going to schools, parks, community centers, and other important community-elevating services.

Facts and fallout

When comparing homes in Black neighborhoods to those in white neighborhoods, the median home value comes in 55% lower. And to be sure, homes in Black neighborhoods tend overall to be older and smaller. They're also more likely to be attached, rather than single-family homes. This legitimately drops the valuation of a property. And due to lower property values, schools are not as well funded. These issues cannot be overlooked as they both play a role in lower appraisals.

However, according to the Brookings Institution, even after factoring in these disadvantages, a home in a Black neighborhood should only be valued 23% less than a comparable home in a white neighborhood. The fact that the difference stands at 55% means homeowners in Black neighborhoods are losing $156 billion cumulatively.

While Freddie Mac concludes that many homes in white neighborhoods are overvalued, the same is simply not true for entire swathes of minority neighborhoods.