Implicit bias describes what is happening when, despite our best intentions and without our awareness, racial stereotypes and assumptions creep into our minds and affect our decisions and actions. Whether implicit bias occasionally or regularly impacts real estate appraisals has been discussed by many and studied by some, and certainly is not an easy question to answer. If you talk to local appraisers, they will tell you it just does not happen, and some of the studies and surveys seem to confirm this and reflect a low incidence of bias.
But then there are the stories in the news about Black families who have had to “white-wash” their home to receive a reasonable appraisal. What is a “white-wash?” If appraisers undervalue their properties, Black homeowners “white-wash’’ their properties by having white friends stand in for them and replacing family photos with pictures of white people. Then they have a second appraisal. The result typically is a substantially higher appraised value, often several hundred thousand dollars higher. Some studies found appraisal reports where the “Neighborhood Description” field was completed to refer to race, such as a reference to a neighborhood being originally “White-Only,” before becoming a “White-Flight Red-Zone” to explain why the neighborhood is mostly “Working-Class Black” now. Are these isolated incidents of incompetence, or are there concerns with the appraisal profession or the appraisal process that should be addressed?
The conversation about whether there is implicit bias in appraisals often includes a look at homeownership statistics based upon race, the cases reported in the news where race seemingly impacted appraised value, the history of segregation in this country, the absence of diversity among appraisers, the difficulty in becoming an appraiser, the study conducted by the Property Appraisal and Valuation Equity (PAVE) Task Force, and the Appraisal Foundation proposals for implicit bias education and practice courses for earning experience hours to make it easier to earn credentials. Different organizations have taken steps to enhance implicit bias awareness and increase fair housing education, but it is not evident that any possible appraisal bias originates from the conduct of individual appraisers or that these measures will eliminate any appraisal bias and discrimination.
Homeownership statistics
The homeownership rate for white Americans has been consistently near 70% since 2017. In the same period, the homeownership rate for Black Americans has been nearly 30 percentage points lower — around 41%. For Hispanic Americans, the homeownership rate has held above 47%, and for Asian Americans it has been above 59% over the same time period. As of the third quarter of 2021, the homeownership rate of non-Hispanic white households was 74% while the rate for Black households was 44%, according to the U.S. Census Bureau. In addition, the net worth of a typical white family is nearly eight times greater than that of a Black family.
Systemic segregation
The 20th century saw decades of systemic racism: a combination of private entities and individuals, and federal, state and local government engaged in segregated neighborhood development, redlining, racially restrictive covenants and other measures to isolate and segregate Black neighborhoods, deny mortgage credit to Black and immigrant buyers, and deny the families living in those communities the opportunity to build equity through homeownership and create intergenerational wealth. Real estate practitioners were involved in those efforts. The National Association of REALTORS® (NAR) issued a formal apology for decades of racist policies designed to limit homeownership by non-white people.
The segregated neighborhoods created via this dismal history unfortunately continue today to a large extent. Black homeowners have far less equity to use to build wealth for their families when their homes are undervalued. With lower property values, for instance, they have been less able to take advantage of low interest rates and refinance their mortgages, creating lower mortgage payments and freeing up funds for other purposes.
Perhaps part of the problem comes from the appraisal process itself. When appraisers use the sales comparison approach that asks appraisers to determine the value of a Black family’s home based on the sale prices of similar homes in the same neighborhood, the homes in that neighborhood may have been historically undervalued by redlining and similar mechanisms while comparable homes in other neighborhoods have higher values. This process gives appraisers discretion in choosing comparable homes and the opportunity to unintentionally perpetuate bias by using the undervalued comparable sales in neighborhoods of color.
Proposed guidance
The Biden administration launched the Property Appraisal and Valuation Equity (PAVE) Task Force led by Housing and Urban Development (HUD) Secretary Marcia Fudge and former United Nations Ambassador Susan Rice. The PAVE Task Force was created to address discrimination in the appraisal and homebuying process. PAVE is evaluating issues related to the valuation process, diversity in the appraisal industry, and appraiser education and outreach.
Similarly, the Appraisal Foundation has a Diversity, Equity and Inclusion initiative. The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) established The Appraisal Foundation as the national authority for all appraisers and the source of appraisal standards and qualification criteria.
- The Foundation’s Appraisal Standards Board (ASB) has existing guidance in Advisory Opinion 16: “Fair Housing Laws: Avoiding Bias in Real Property Appraisal and Appraisal Review Development and Reporting” that is being reviewed for possible updates. The Advisory Opinion provides guidance to real property appraisers related to avoiding bias or illegal discrimination.
- The Foundation’s Appraiser Qualifications Board adopted a new edition of the Real Property Appraiser Qualification Criteria, which adds “Valuation bias, fair housing, and/or equal opportunity” to continuing education and to the basic appraisal principles course that all appraisers take.
- The Appraisal Foundation believes the appraisal industry should reflect the diversity of the nation. See the Diversity survey of the appraisal profession at appraisalfoundation.sharefile.com/d-s85f0de36c92a43a1bc812bd8fa5cf475, which shows that is not currently the case. About 85% of appraisers in the U.S. are white, according to first quarter 2019 data from the Appraisal Institute. Approximately 77% of all appraisers are men, and roughly 71% are at least 51 years old.
- To encourage new appraisers who are more representative of the population to enter the field, different measures have been contemplated. As probably all appraisers can agree, regardless of their view about implicit bias, one of the biggest problems for any appraiser applicant is the requirement to have 1,000 to 3,000 hours of experience, depending on the credential, before taking the exam. That experience requirement generally means the prospective appraiser applicant must find a supervisor, but very few appraisers are willing to act as supervisors and train their future competitors. Most supervisors are a relative or family friend already in the business. The Appraisal Advisory Board has adopted the Practical Applications of Real Estate Appraisal (PAREA) as an alternative virtual method for trainees to build experience without a supervisor, but this has not yet been made available. PAREA provides an alternative to the traditional supervisor and trainee model with the goal of alleviating barriers to entry into the appraisal profession.
A better-trained, more diverse next generation of appraisers is a good step but simply not enough to make up for this country’s long history of discrimination. But the fact it has been acknowledged there is something that is not working as far as equity building for Black homeowners.
The concern with implicit bias and potential discrimination in appraisals has many facets, and there is not likely to be just one answer. Moreover, implicit bias and discrimination are concerns for all professionals within the real estate industry — not just appraisers. Some of the proposed reforms may be helpful for everyone, but modernization and systemic changes to the appraisal process may be needed to provide equity building for all property owners.
Resources
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.