PD&R Quarterly Update: Advancing Equity in the Home Valuation Process

PD&R Quarterly Update: Advancing Equity in the Home Valuation Process

PAVE aims to reduce appraisal inequities and discrimination across different racial groups. Photo credit: istockphoto.com/jhorrocks

On July 29, 2021, HUD’s Office of Policy Development and Research (PD&R) held its Quarterly Update event titled Advancing Equity in the Home Valuation Process. During the virtual event, HUD Secretary Marcia Fudge announced a new interagency initiative called the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) followed by a panel discussion on the conditions surrounding inequity in home valuations. Aimed at combating appraisal discrimination, PAVE is a response to President Biden’s executive order requiring federal agencies to find solutions that advance racial equity. Alanna McCargo, senior advisor of housing finance in the Office of the HUD Secretary, moderated the panel, which included Svenja Gudell, chief economist at Zillow Group; Noerena Limón, senior vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals; Michael Neal, senior research associate at the Urban Institute; and Andre M. Perry, senior fellow at the Brookings Metropolitan Policy Program.

Inequality in Home Appraisals

The panelists shared quantitative and qualitative evidence of appraisal inequities across different racial groups and the consequent disparities in wealth and public resources. When compared with similar homes with access to similar amenities, properties in primarily African-American neighborhoods are undervalued by 23 percent, which translates into approximately $156 billion in lost equity across an entire racial group. On an individual level, these losses reduce families’ opportunity to purchase a new home, live in a better neighborhood, or send their children to college, all of which exacerbate the existing racial wealth gap. At the community level, home values determine public funding for schools, and these losses result in inequities in the quality and quantity of resources available for education. For example, school districts in predominantly White neighborhoods receive $23 billion more than those in predominantly nonwhite districts.

Panelists explained that these disparities are rooted in past practices and current barriers that perpetuate the real estate industry’s “freedom to discriminate.” When the real estate industry first emerged in the early 20th century, appraisals were used to intentionally exclude African-American families from White communities. Since then, homes in predominantly nonwhite neighborhoods have been consistently undervalued because of the lack of redress of exclusionary zoning laws, redlining, and bias in an industry overwhelmingly run by White males.

The Role of Appraisal Valuation Models in Equitable Home Valuations

Evidence of human bias lies in the fact that formerly redlined communities still have lower home values than do those with no history of redlining, mainly because appraisers maintain a more negative perception of African-American neighborhoods. Perry stated that industry professionals perceive “twice as much crime than there actually is…and worse education than there actually is.” Gudell said that one approach to combating the effect of human bias is appraisal valuation models (AVMs), which, according to Neal’s research, have not indicated a technological bias. One objective of PAVE is to improve methods of data collection, and McCargo suggested an analysis of the inputs, transparency, and dissemination of data in the automated evaluation process. Gudell explained that one benefit of AVMs is that they do not use demographic data as an input, which would introduce bias to the models. She said that instead of focusing on the amenities and home characteristics of one neighborhood, AVMs should create comparable sales data from a cluster of similar neighborhoods to mitigate bias.

Producing more equitable AVM output also relies on data transparency. Gudell stated that offering consumers more housing data, such as the sales price and mortgage balances of neighboring homes, helps reduce asymmetric information. Having this data can help homeowners better understand if they are selling their homes at an appropriate price point and challenge undervalued appraisals, thereby reducing or eliminating equity loss from misevaluations.

Gudell and Perry also agreed that making more data available will increase industry confidence in appraisal models. Increasing the sample size from which the data are drawn creates a larger distribution with a greater confidence range than appraisals relying on single-point data, such as the previous sales price of one home. Perry also explained that a national database should house appraisal figures so that consumers and industry professionals have a reference point if they suspect bias in their appraisal process.

PAVE’s Next Steps for Appraisal Equity

PAVE is taking a deeper look at systemic bias in the appraisal industry. The task force has consulted with stakeholders in the fields of real estate, civil rights, advocacy, and philanthropy to outline core objectives to accomplish. PAVE’s executive director, Melody Taylor, states that within 180 days of launching, PAVE will produce a final action report that will outline the causes and effects of undervaluation and the “consumer-facing industry actions and policy implementation strategies” that will ensure that communities of color have equity in the purchase, selling, and refinancing of their homes. One short-term goal of PAVE is the launch of its website, where homeowners can find resources to file an official appraisal complaint. However, although such complaints are necessary in discovering potential racial bias and restructuring accountability, Perry explains that often there is no outcome of the complaints. In 2018, a firm representing appraisers who received complaints from various sources reported that only 12 percent of cases resulted in disciplinary action by state appraiser licensing boards.

Because housing makes up more than 16 percent of the U.S. gross domestic product, panelists agree that appraisal bias bears a social cost to the entire nation, not just communities of color. The PAVE initiative is necessary to identify barriers to appropriate valuations, hold industry professionals accountable, and optimize data practices that favor nonbiased financial technology, such as AVMs. Finally, Perry stated, “This is an issue that, if we can tackle well, we uplift everyone's opportunities towards the American dream.”