Families of color could be missing out on the full benefits of homeownership and/or could be precluded from obtaining necessary financing to realize the American Dream due to appraisal gaps.
Two Appraisals on Same House Likely Different Based on Race
Freddie Mac recently released an analysis of more than 12M home appraisals. Freddie found that where the home being appraised in terms of state, metro/town and/or neighborhood influenced the appraised valuation of the home based on race.
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Take a look:
- Homes appraised in Black communities valued at
-12.5% below original construction cost of home
– Homes appraised in Latino communities valued at -9.4% below original construction cost of home
- Homes appraised in White communities valued at -7.4%
below original construction cost of home.
Michael Bradley, senior vice president with Freddie Mac, said that this appraisal gap “…could mean families might miss out of the full wealth-building benefits of homeownership or may be unable to get the financing needed to achieve the American Dream in the first place.”
Appraisal Gap Negatively Impacts Homeowner Five Ways
Most Americans regardless of race/ethnicity begin building generational wealth via owning a home. Data from the St. Louis Fed tells us that, as of April 2021, 74% of Whites in the US are homeowners, 44% of Blacks are homeowners and 47% of Hispanics are homeowners.
If/when there is an appraisal gap based on race in the valuation of a home, there are a minimum of five ways a homeowner “stuck” with an undervalued appraisal can be affected:
- Likely barred from realizing full equity growth in the home
- Likely to have more difficult time landing a mortgage
- Likely to carry a higher interest rate on a mortgage loan if/when they get a loan
- Potentially barred from borrowing against the home
- Potentially barred from selling that home at a greater (and true) profit at later time.
Freddie Mac Analysis Offers Credible Evidence about Existence and Realities of Appraisal Gaps
Housing discrimination experts point to Freddie Mac’s analysis of the appraisal gap as clear, credible evidence of widespread racial bias in home appraisals. Andre Perry, senior fellow with the Brookings Institute, said, “What you have is arguably the most data-rich organization issuing a scathing report about appraisers. (Freddie Mac) is the utmost authority on housing, and they’re basically saying there’s appraiser bias that’s robbing people of wealth.”
Alternative Solutions?
This Freddie Mac analysis points to a role that automated property valuation services and tools could play in terms of rectifying this appraisal gap. Perry said, “It’s going to force the (appraisal) industry to reckon with its members and reckon with racism. If you have an authority like Freddie issuing this report, there should be some type of follow up and guidance on how to hold people accountable.”
Thanks to Freddie Mac, National Public Radio USA Today, and CBS News.
