Jeff Ostrowski | (TNS) Bankrate.com
For middle-class Americans, homeownership is a key component of their family’s net worth. But many Black and Latino Americans find themselves on the outside looking in. Their homeownership rates are significantly lower, and they often find their properties are consistently less valuable than comparable ones in White neighborhoods.
This racial gap in home appraisals is a real phenomenon, one that sabotages the wealth-building power of homeownership in Black and Latino neighborhoods, according to a significant body of research. Among the largest studies of late is mortgage giant Freddie Mac’s analysis of 12 million transactions, showing that appraised values are more likely to fall short of the purchase price for homes in census tracts with a higher share of Black and Latino households.
The appraisal gap matters because it creates a barrier for Black and Latino homeowners hoping to sell their property for a profit, and for buyers seeking financing for a purchase. What’s more, it has a lasting impact on the overall net worth of these consumers — the ramifications of which can extend through generations.
However, there are glimmers of good news: The racial gap in appraisals has narrowed in nearly every state in recent years, according to a Federal Housing Finance Agency (FHFA) review published in April.
Minority group homeownership data and statistics
—In mostly Black census tracts, 12.5% of homes appraised at a value below the sale price, compared to just 7.4% of homes in predominantly White areas, Freddie Mac reports.
—In predominantly Latino neighborhoods, fully 15.4% of homes for sale were appraised at below the sale price, per Freddie Mac.
—The Black homeownership rate in the first quarter of 2024 was 45.7%, compared to 74% for White Americans, according to the U.S. Census Bureau.
—The Hispanic homeownership rate in Q1 2024 was 49.9%, the Census Bureau reports.
—Homes in Black neighborhoods are valued at 21% to 23% below what their valuations would be in non-Black neighborhoods, the Brookings Institution reports.
—Homes in majority-Black neighborhoods are 1.9 times more likely to be appraised under the contract price than homes in majority-White neighborhoods, Brookings says.
—The median appraised home value is 15% lower in mostly Black neighborhoods compared to homes in neighborhoods where less than 1% of the population is Black, Brookings estimates.
A measurable racial gap
Anecdotal evidence about racial disparities in home valuations has existed for years. But Freddie Mac’s study, an examination of 12 million appraisals ordered for home-purchase transactions from 2015 to 2020, added some hard data points to claims that appraisers might, consciously or subconsciously, undervalue homes in non-White neighborhoods. Valuing a home is an imprecise science, of course, so Freddie compared appraised values to the “contract price” — that is, the amount that buyers had agreed to pay.
Its analysis found that homes in mostly Black and Latino census tracts were assigned appraised values lower than the contract price more frequently than homes in White tracts. While 12.5% of homes in mostly Black areas were appraised for less than the contract price, just 7.4% of homes in mostly White tracts experienced appraisal shortfalls. What’s more, as the concentration of Black or Latino residents in census tracts increases, the appraisal gap increases, Freddie Mac found.
And the culprit doesn’t seem to be a small number of unenlightened appraisers. A large portion of the professionals who completed appraisals in both minority and non-minority areas generated statistically significant gaps, Freddie Mac notes.
Housing industry takes aim at appraisal gap
The Appraisal Institute lauded Freddie Mac for exploring the issue of bias in home valuations. “Unconscious bias is real and exists in all industries,” the trade group said in a statement. “Appraisal is one piece of a larger ecosystem, and appraisal groups are working alongside consumer groups, real estate brokers and agents, banks, government agencies, think tanks and others to explore where housing inequities may stem from and what combination of solutions should be considered.”
Though it lent considerable credence to the issue, Freddie Mac’s report was not the first. A 2018 study by the Brookings Institution, the nonprofit think tank, found that Black-owned homes are undervalued by $48,000 on average. A follow-up Brookings study in December 2022 unearthed more details, zeroing in on appraisals. It found that homes in Black neighborhoods to be valued at 21% to 23% below the levels the valuations would be in non-Black neighborhoods.
Brookings also found that homes in majority-Black neighborhoods are 1.9 times more likely to be appraised under the contract price than homes in majority-White neighborhoods. And the median appraised value is an estimated 15% lower in mostly Black neighborhoods compared to homes in neighborhoods where less than 1% of the population is Black.
The mortgage and appraisal industry is acknowledging the issue. Banking giant JP Morgan Chase pledged a $3 million donation to the Appraiser Diversity Initiative, a collaboration between the Appraisal Institute, the National Urban League, Fannie Mae and Freddie Mac. The megabank said its goal is “to root out bias in the residential appraisal process.”
How does the appraisal gap affect minority groups?
Appraisals are just one piece of a stubborn racial divide in the U.S. housing market. Black Americans (especially Black women) have less wealth overall, and therefore are less likely to own homes. When they do purchase, they find themselves more likely to pay higher interest rates on their mortgages.
Black homeowners often struggle to build long-term wealth because their properties are undervalued — and there’s no straightforward easy way to dispute an appraisal or have it changed.
The worth of a home directly impacts personal wealth overall: Black and Brown groups often are less wealthy because their homes, a key asset, are deemed less valuable. But the appraisal gap’s cause-and-effect dynamics is a classic chicken-and-egg question. Are homes in Black and Brown neighborhoods undervalued because their owners and those areas are in fact poorer and less prosperous? Or are African- Americans and Latinos hindered from financial prosperity because their homes are undervalued? Or is it a mix of both?
Appraisal gap is the tip of a bigger iceberg of disparity
Whatever the answer, it’s clear that minority groups lag White Americans by a variety of financial yardsticks. In one measure of the steep U.S. wealth gap, the Federal Reserve reports that as of the first quarter of 2024, White Americans owned assets worth $141.5 trillion. Black Americans had $6.7 trillion in assets, while Hispanics held $4.54 trillion.
In another illustration of the divide, data from the Federal Reserve Bank of St. Louis says White households had an average net worth of $1.28 million, compared to $310,000 for Black households and $242,000 for Latino households (as of 2023).
Employment rates are another dreary statistic. Unemployment for Black Americans is routinely much higher than for White Americans. In May 2024, the jobless rate for African Americans was 6.1%, compared to just 3.5% for White workers, according to the U.S. Labor Department. That of course impacts the ability to save and invest, as well as to accrue measurable earnings for Social Security benefits.
All these financial headwinds turn into a self-perpetuating cycle. Less wealth means fewer resources available for college and higher education (minority students tend to carry bigger student loan balances) and for health care (the average lifespan for Black Americans is nearly five years less than for White Americans, the Centers for Disease Control reports). A smaller net worth ripples through the financial lives of minority groups, hampering their ability to save for retirement, launch businesses and make investments. And, ultimately, to pass money on to heirs — perpetuating a generational wealth gap.
Good news on the racial gap front?
Some evidence exists that the appraisal gap may actually be narrowing. In an April 2024 study of home valuations for conventional loan applications, the FHFA compared appraisals between Q1 2013–Q2 2021 and then Q2 2022–Q4 2023. During the two periods, “property valuation inequalities” between homes in majority-Black and majority-White neighborhoods declined from 6% to 3.8%, while the gap between Hispanic and White areas declined from 8.3 to 5.1 percentage points. The declines occurred in nearly all U.S. states.
The agency, which oversees mortgage giants Fannie Mae and Freddie Mac, credited the effect of a federal task force started in 2021 that “increased awareness of racial bias in home valuations” for states and other governments.
Other public efforts may be paying off as well. In 2021, the U.S. Department of Justice launched an initiative to combat redlining, a discriminatory practice that includes biased appraisals (see FAQ, below). As of autumn 2023, the Combating Redlining Initiative had secured over $100 million in relief for communities of color nationwide that have experienced discrimination from mortgage lenders.
FAQ
—What happens if a home appraisal is lower than the buyer’s offer?
The buyer is in a tough spot, officially known as an appraisal gap. Say a buyer has made an accepted offer and signed a purchase and sale agreement to pay $300,000 for a home. But then the buyer’s mortgage lender appraises the home for only $270,000. Since the lender won’t finance more than the appraised value, the buyer is now short of funds to purchase the home. There are typically three options: The seller can reduce the home’s price to match the appraisal value. The buyer can agree to come up with a larger down payment and accept a smaller mortgage. Or the deal might fall apart, in which case the seller keeps looking for a buyer and the buyer resumes the home search.
—Do low home appraisals relate to redlining?
Yes, they are something of a legacy of this now-illegal practice. The term redlining stems from a decades-old pattern of discrimination — lenders color-coded maps to exclude homeowners in Black and other non-White neighborhoods from mortgages, on the grounds that these areas posed a high investment risk. That sort of overt bias was outlawed by the Fair Housing Act of 1968 and by subsequent federal legislation in the 1970s. Still, the ongoing appraisal gap reflects systemic racism that continues to lurk in the housing market.
—What can people do to combat lower home appraisals?
Not much, which is why the issue has gained so much attention. An individual homeowner can’t change the demographics of the surrounding neighborhood and its comps (comparable properties that appraisers use to determine a home’s worth). As far as the individual home goes, news reports have described African-American homeowners preparing for walk-through appraisals by removing family photos and other personal effects that would indicate their race.In general, though, Realtors tell sellers of all races to open a home to buyers and to appraisers only after it has been thoroughly de-cluttered and stripped of personal objects. Sellers of any race or creed are often advised to remove photos, religious or political artifacts and even artwork. The idea is to present a neutral setting that allows buyers to picture themselves in the home — and for appraisers to be able quickly to assess the home’s fundamental features and fixtures.And sellers and buyers need to have a contingency plan in place should the appraisal come in low. Buyers should be prepared to come up with extra cash to bridge the appraisal gap, and sellers should think about whether they’re willing to take a cut to make the transaction happen.
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