Racial Bias in Real Estate—Is It the Appraiser's Fault?
by Maureen Sweeney, SRA, AI-RSS
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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?
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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.
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Mary Cummins of Cummins Real Estate is a
certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.
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