For many middle-class Americans, homeownership is a crucial component of their family’s net worth. However, many Black and Latino Americans often find themselves on the outside of this spectrum. With their homeownership rates significantly lower, many find their properties considerably less valuable than those in White neighborhoods.
The racial gap in home appraisals is a real phenomenon that sabotages the power of homeownership in Black and Latino neighborhoods. Among the most extensive studies surrounding this is mortgage giant Freddie Mac’s analysis of 12 million transactions, which shows appraised values are more likely to fall short of the purchase price for homes in census tracts with more Black and Latino households.
This appraisal gap matters, as it creates a barrier for Black and Latino homeowners who hope to sell their property for profit and buyers seeing financing for a present or future purpose. These numbers also have a lasting gap in these consumers’ overall net worth, with far-reaching ramifications.
Despite this, there is good news, with the racial gap in appraisals having narrowed in nearly every state in recent years, based on a Federal Housing Finance Agency (FHFA) review published in April.
Measuring the Race Gap
Evidence about racial disparities in home valuations has been known for many years. However, the Freddie Mac study, which examined 12 million appraisals for home-purchase transactions from 2015 to 2020, added data points to claims that appraisers may consciously or unconsciously undervalue homes in non-White neighborhoods. Since valuing a home is an imprecise science, Freddie Mac compared the appraised values to the “contract prices” – or the amount that buyers agreed to pay.
Their analysis found that homes in Black and Latino census tracts were assigned appraised values lower than the contract prices found more frequently in homes in White tracts. While 12.5 percent of homes in primarily Black areas were appraised for less than their contract price, 7.4 percent of homes in mainly White tracts experienced appraisal shortfalls. Freddie Mac’s analysis discovered that the appraisal gap increases as the concentration of Black or Latino residents in census tracts increases.
Confronting the Appraisal Gap
The Appraisal Institute praised Freddie Mac for exploring the issue of bias, whether it be conscious or not, in home valuations.
“Unconscious bias is real and exists in all industries,” the trade group said. “Appraisal is one piece of a larger ecosystem, and appraisal groups are working alongside consumer groups, real estate brokers and agents, banks, government agencies, think tanks, and others to explore where housing inequities may stem from and what combination of solutions should be considered.”
Freddie Mac’s report was one of many that tackled this issue. A 2018 study by the Brookings Institution, a nonprofit think tank, found that average black-owned homes are undervalued by $48,000. A follow-up study in December 2022 revealed more details that looked deeper into appraisals. The study found that homes in Black neighborhoods were valued at 21 to 23 percent below the levels that valuations in non-Black neighborhoods would be.
Brookings also found that homes in majority-Black neighborhoods are 1.9 times more likely to be appraised under the contract price than homes in majority-White neighborhoods. The median appraised value is also an estimated 15% lower in primarily Black neighborhoods compared to those homes in areas where less than 1 percent of the population is Black.
The mortgage and appraisal industry has acknowledged the issue, with banking giant JP Morgan Chase pledging a $3 million donation to the Appraiser Diversity Initiative, a collaboration between the Appraisal Institute, the National Urban League, Fannie Mae, and Freddie Mac. The bank aims to “root out the bias in the residential appraisal process.”
How Does This Affect Minority Groups?
Appraisals are just one piece of the divide in the US housing market. Black Americans, especially Black women, have less wealth overall and are less likely to own homes. When they manage to purchase, they often pay higher interest rates on their mortgages.
Black homeowners often struggle to build wealth long-term because their properties are undervalued. There is also no easy way to dispute an appraisal or have it changed after the fact.
The worth of a home impacts personal wealth. Black and Brown groups are often less wealthy because their homes are deemed less valuable. However, the dynamics of the appraisal gap lead to the question of whether or not homes are undervalued. Their owners are in areas that are poorer and less prosperous, or African Americans and Latinos are hindered from financial prosperity because their homes are undervalued.
The appraisal Gap Is Only the Tip of the Disparity
Minority groups lag behind White Americans by a variety of financial issues. In one measure of the US wealth gap, the Federal Reserve reported that, as of the first quarter of 2024, White Americans owned assets worth $141.5 trillion, while Black Americans had $6.7 trillion in assets. Hispanics held $4.54 trillion. Data from the Federal Reserve Bank of St. Louis has also stated that White households had an average net worth of $1.28 million, compared to $310,000 for Black households and $242,000 for Latino households (as of 2023.)
Employment rates are also a factor in the disparity, with unemployment for Black Americans being much higher than for White Americans. In May 2024, the jobless rate for Black Americans was 6.1 percent, compared to 3.5 percent for White workers.
Less wealth means fewer resources for college, higher education, and health care. Minority groups’ smaller financial worths echo through their financial lives, hampering their ability to save for retirement, launch a business, or make investments and pass money on to their heirs.
Good News?
Evidence suggests that the appraisal gap may be narrowing. In an April 2024 study of home valuations for conventional loan applications, the FHFA worked to compare appraisals between Q1 2013–Q2 2021 and then Q2 2022–Q4 2023. During the periods, “property valuation inequities” between homes in majority-Black and majority-White neighborhoods declined from 6 percent to 3.8 percent. In contrast, the gap between Hispanic and White areas declined from 8.3 to 5.1 percentage points. The declines took place in almost all US states.
The agency, which oversees mortgage giants Fannie Mae and Freddie Mac, credited the effect of a federal task force that started in 2021, which “increased awareness of racial bias in home valuations” for states and other governments.
In 2021, the US Department of Justice launched an initiative to combat redlining – a discriminatory practice that includes biased appraisals. As of the autumn of 2023, the Combating Redlining Initiative had secured $100 million in relief for communities of color that experienced discrimination from mortgage lenders.
Appraising the Mortgage Appraisers
Part of the racial appraisal problem may have roots in the appraisers themselves. The property appraisers and assessors’ profession is 94.7 percent White and 0.6 percent Black, which makes it the least racially diverse of 800 occupations surveyed by the Bureau of Labor Statistics. This “lack of diversity … can contribute to patterns of mis-valuation in communities of color,” the US Department of Housing and Urban Development (HUD) charged in their statement against The Appraisal Foundation (TAF), which is a private organization that sets standards and qualifications for industry-valuation professionals.
On July 11, 2024, HUD announced a settlement with TAF., which requires policy changes that expand the pathways to becoming an appraiser, which currently relies heavily on personal contacts within the field. TAF will also establish a $1.22 million scholarship fund to finance programs that help aspirants fulfill the experience requirements to earn their state appraisal licenses.
