Comp selection is at the heart of appraisal bias, advocacy groups claim

When it comes to home valuation it’s all about the comps — sales of comparable properties used by appraisers to establish a fair market price.

The valuation process is meant to be technical and objective, but news reports of Black homeowners needing to use white stand-ins to obtain fair market valuations on their homes have called that objectivity into question. A study conducted by the National Community Reinvestment Coalition this summer found that racial disparities in home valuations exist and that biases in selecting comps are a big factor.

NCRC recruited several interracial couples — in which one spouse is Black and the other is white — in the Baltimore area to participate in a “mystery shopper” trial. The couples would have their homes appraised twice, once while only the white spouse was home and with no indications that anyone Black lived in the home and then again under the opposite circumstances, with the Black spouse home and no sign of white occupancy. 

In most cases, the homes were appraised differently for the two spouses. Sometimes the white spouse received the higher valuation, sometimes the Black spouse did, but on average, appraisals given to white spouses were nearly $7,000 more than those given to their Black partners.

One reason for this disparity is that the race of the homeowner present during the appraisal seemed to influence which homes were chosen as comps, said Jacob Lilien, NCRC counsel for fair housing enforcement.

“Our study showed that the appraisers who dealt with Black homeowners were more likely than appraisers who dealt with white homeowners to choose homes in Blacker neighborhoods as comparatives and that played a role in the Black homes being valued less,” Lilien said. “This has an impact on the ability of Black homeowners to get a fair valuation for their home.”

Disparities in home valuations have driven racial wealth inequalities, housing advocates say.

The findings coincide with increasing scrutiny by bank regulators, the White House and Congress of appraisal-valuation practices. Earlier this year, the Department of Housing and Urban Development launched an investigation into the Appraisal Foundation, the organization tasked with writing the rules for the appraisal profession, for its handling of racial bias.

The Appraisal Foundation did not respond to requests for comment Friday. The Appraisal Institute, a national trade group for the appraisal industry, did not immediately respond to a request for comment, either.

Appraisers are typically hired by banks or other lenders to value homes ahead of a sale or refinance. This is meant to prevent banks from lending more than a property is worth. If a home is appraised below an agreed-to sales price, buyers must make up the difference by providing more equity upfront. For homeowners, the appraised value can determine whether a sale can go through or how much equity they can borrow against or take out of their homes.

Marvin Owens, chief engagement officer for the exchange-traded funds manager Impact Shares and a former senior director of the NAACP, said the routine undervaluing of minority-owned homes has contributed to the nation’s racial wealth gap.

“There’s some sense that the actions of appraisers are resulting in an inequity that is having real economic impact on communities of color, on Black communities, and we just can’t get past that as if it’s not a big deal. It is a big deal,” Owens said. “When we talk about the discounting of a home’s value, we’re talking about less money to send somebody to college, we’re talking about less money to start someone’s own business, we’re looking at less money to do the kinds of improvements that could increase value. This has a direct economic impact on communities of color.”

Appraisers are given discretion to select homes used as comparables. Choosing accurate comps is a point of pride for appraisers who claim a deep knowledge of specific market dynamics. The reliance on comps is also used as a defense against charges of racial bias, with appraisers arguing that their reports are a reflection of market realities, not personal sentiments.

Still, values can vary widely from market to market, even within the same metro area. Lilien said the apparent race of the homeowners in the NCRC study seemed to shape which market the appraisers perceived them to be in.

“We looked at the demographics of the homes that were used as comparatives and we found that some of the appraisers chose whiter neighborhoods, some chose Blacker neighborhoods, and the appraisers who dealt with the Black partner were more likely to choose Black neighborhoods,” Lilien said. “We don’t know the race of the owners of the comparative homes, but we know the demographics of the neighborhoods, and that’s what’s concerning to us.”

Neighborhood racial composition makes a difference in how homes are appraised, according to a National Fair Housing Alliance report published this month. The study, which analyzed the Federal Housing Finance Agency’s Uniform Appraisal Dataset, found that the more white residents there were in a neighborhood, the higher homes tended to be valued. In 2021, the average home in a neighborhood with no white residents was appraised at $276,000, compared with $542,000 for areas that were 50% white and $808,000 for areas that were all white.

The report traces the roots of race-based property valuation to the early days of Colonial America, which eventually gave way to the practice of “redlining,” in which minority-majority neighborhoods were designated as being less creditworthy than white areas. While these practices have been outlawed for decades, the undervaluing of these areas persists today.

“In short, the appraisers’ selection of comps is critical because they are the base numbers that determine value,” the NHFA report notes. “Since comps are previous sales, they ensure past appraising practices are carried into the future.”

When adjusted for size, amenities and socioeconomic standing, the average home in a white-majority neighborhood is appraised at $371,000 more than an equivalent property in a majority-minority neighborhood, the NFHA study found, with that gap having widened by 75% between 2013 and 2021. During the pandemic, white homes increased by $136,000 on average, more than double the $60,000 of appreciation experienced by comparable homes in communities of color.

“Highly discretionary appraisal practices have led to decades of unfair and biased valuations and directly contributed to the persistent racial wealth gap,” Maureen Yap, NFHA’s senior counsel, said in a statement. “Appraisal reform is something our nation and communities desperately need.”

The value discrepancies in the NCRC study were less severe than those seen nationally, but Lilien said the most striking finding from the exercise was the lower quality of customer service some of the Black participants received. 

In one instance, an appraiser took two and a half months to complete a report for a Black homeowner, compared with the average turnaround time of between a few days and a few weeks. Such lengthy delays can have significant impacts, Lilien said, noting that the Federal Reserve hiked interest rates multiple times while the couple waited for their report, a delay that would have had a material impact on their financing costs.That same appraiser submitted a report for a white homeowner after just two and a half weeks, even sending an email detailing a timeline for completion.

Another Black homeowner in the study never received a report, despite repeated outreach to the appraiser. 

“It’s not easy to get your house appraised — it’s a hassle to do it,” Lilien said. “And then to also suffer the indignity of being treated differently because of your race in the process, that’s an issue we need to shine a light on.”

Earlier this month, NCRC filed complaints with Department of Housing and Urban Development against two appraisers it encountered during the study, charging them with racial discrimination. HUD has not taken action against either appraiser and it did not respond to a request for comment.

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