Racial Bias in Real Estate: Is it the Appraisers’ Fault?
In the past year, the appraisal industry has been under attack from various academics who claim “racial bias” on the part of real property appraisers providing appraisal services to lenders who provide home mortgages. These academics do not fully understand various types of valuation specialties, the appraisers who practice in these specialties, and the myriad of laws that must be followed. Help is needed to explain the appraisal industry, including the specialties and the types of reports. An understanding of the different components of the appraisal industry is necessary to assist various academics, journalists, the media, the public, and the public trust to whom Congress charged the appraisal profession in protecting. What is an appraiser?
An appraiser is one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.
There are several types of appraisers, just as there are different types of doctors. Some doctors, including those who are currently criticizing the appraisal profession, earned a Doctor of Philosophy, which is an indication that an individual has achieved mastery in a specific field of study and contributed original research to the knowledgebase of that field. These doctors may or may not be licensed by the states in which they practice or teach. Other professionals who earned the right to be called “doctor’ include medical doctors, dentists, and veterinarians; these doctors must be licensed in order to legally practice.
Like doctors in the medical, dental, and veterinary fields, real property appraisers are licensed by the individual states where they practice. Real property appraisers are also regulated by the federal government as a result of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), enacted in 1989 in response to the savings and loan crisis of the late 1980s. Appraisers who develop appraisal reports for federally related transactions must be licensed. An example of a federally related transaction is a home mortgage. In the United States, real property appraisers are licensed by their state. The states’ licensing and regulatory programs have oversight by the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, which reports back to Congress. If a real property appraiser violates professional standards or the rules and laws governing their license, they can be fined, as well as have their license suspended or revoked.
Real property is the interests, benefits, and rights inherent in the ownership of real estate. An example of real property is the right to own, use, lease, rent or sell a single-family residence and the land it is built on. An appraisal report is ordered by lender/client to ensure there is an independent, impartial, and objective individual to develop and report an opinion of the property’s market value to assist the lender/client in their lending decisions. Real property appraisal assignments are typically for one specific property. In most cases, real property appraisal reports are not publicly available. In most cases, real property appraisers verify and analyze specific data in the market that applies to the individual property they are appraising.
Mass appraisers and assessors analyze general data in the market. A mass appraisal is the process of valuing a universe of properties as of a given date using standard methodology, employing common data, and allowing for statistical testing. Mass appraisal is a widely accepted tool for the valuation of property for the purpose of taxation. The goal of a mass appraisal is to achieve assessment equity for many properties and to ensure that all properties within the same area are valued fairly and accurately. The information the assessor has is considered part of the public record. Appraisers and assessors who develop mass appraisals for ad valorem tax determination are not regulated by the federal government, and depending on the state, may or may not be licensed. Further, the position of tax assessor/appraiser may be an elected office or an appointed government official. In some cases, they may not be adequately trained or qualified to do the job which they were elected, hired, or appointed to do.
Is there reliable data that indicates there is a problem with unfair taxing by practitioners in the mass appraisal and assessment specialty? Yes. The Chicago Tribune did a fantastic job investigating, verifying, and reporting of the unfair taxing in 2017 in their 4 part series, The Tax Divide: How flaws in Cook County property tax assessments harmed the poor and helped the rich. Here are the individual segments of this excellent series: Part 1: An Unfair Burden: The Problem with Appeals, Part 2: The Problem with Appeals, Part 3: Decades of Errors, and Part 4: Commercial Breakdown. The assessor who was the subject of this investigation, Joe Berrios, was defeated in the March 20, 2018, Democratic primary election for Cook County Assessor, conceding to Fritz Kaegi, who went on to win the general election. Assessor Kaegi is working to shift the unfair tax burden from poor neighborhoods to wealthy neighborhoods, and from homeowners to businesses.
There are two other appraisal specialties: personal property appraisal and business appraisal. Personal property includes any tangible or intangible article that is subject to ownership and not classified as real property. This includes furniture, artwork, gems and jewelry, machinery and equipment, and intangible property that is created and stored electronically. Business equity is the interests, benefits, and rights inherent in the ownership of a business enterprise or a part thereof in any form, such as capital stock, partnership interests, and sole proprietorships, options, and warrants. Appraisers who specialize in personal property appraisals and business appraisals are typically not licensed by the state and are not regulated by the federal government.
In the past year, some in the media have been quick to paint all appraisers with the same broad brush. Real property appraisers are accused of racism and bias, through anecdotes, rather than data used to support these claims. These claims have been made by Dr. Andre Perry, Senior Fellow with the Brookings Institute, Dr. Junia Howell, assistant professor of sociology at the University of Pittsburgh, and Dr Elizabeth Korver-Glenn, assistant professor of sociology at the University of New Mexico. Dr. Perry, Dr. Howell, and Dr. Korver-Glenn accused the appraisal profession of racial bias, yet in the 32 years since Congress charged the appraisal profession with protecting the public trust, I know of no discipline against an individual appraiser that was solely based on racial bias. If appraisal assignment results were based on any bias, including gender, sex, sexual orientation, race, age, mental or physical impairment, or any other protected population, the appraiser who developed that report would be in violation of national and state fair housing laws, appraiser licensing laws, and the clear standards of valuation practice. That appraiser should and must be subjected to peer review and regulatory oversight and should suffer the disciplinary consequences.
Licensed appraisers must follow the law, which includes not performing an assignment with bias. Bias is defined as “a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment.” If an appraiser has bias towards socioeconomic status, race, religion, nationality, gender, sex, age, weight, mental or physical disorders or disabilities, or anything else, the appraiser must withdraw from the assignment.
Appraisers collect the data, verify the data from reliable sources, analyze the data, and accurately report the conclusions. If real property appraisers neglect to do this, we can be fined, disciplined, lose our license, or go to jail.
The appraiser is central to the checks and balances in the home lending system. The appraiser is hired by the lender to ensure that there is adequate value in the property being used as collateral by the lender to provide funds to the borrower. The licensed broker/agent negotiates the price of the property, but they are not qualified or licensed to estimate the value. Providing valuation services is the appraisal professional’s job. The appraisal professional provides checks and balances in the housing system, as the appraiser is entirely unrelated to the transaction and is not paid based on the amount of the valuation nor is the appraisal fee contingent on the closing of any loan.
Appraisers reflect the market; we do not create it. This may cause some to get angry, especially when their commission is at stake, a property does not sell, or a homeowner cannot get a home equity loan to update their kitchen or repair the roof. The lender may have reasons to reject a mortgage application that have nothing to do with the appraised value of the property. The borrower may not qualify for the loan, they may have a low credit score, or they have a job that does not pay enough to cover the loan. Because the appraiser is typically the only party in the mortgage process who physically meets the homeowner, the appraiser may become the target of the homeowner’s disappointment, even if the reason for rejection of a loan has nothing to do with the market value of the property.
Appraisers and others, including real estate brokers and agents, and the public, develop opinions of value. What is an appraisal? An appraisal is an opinion of value. There are various valuation products, including an appraisal report (developed by an appraiser), a bifurcated or hybrid appraisal report (developed by an appraiser, a non-appraiser, or a combination of both), an exterior-only/desktop appraisal report (developed by an appraiser or non-appraiser), a Competitive Market Analysis or Broker’s Price Opinion (developed by a sales agent or broker), an evaluation (developed by an appraiser or non-appraiser), and an Automated Valuation Model (AVM), which is a computer generated indication of value based on an algorithm. Each of these valuation products vary on their level of data gathering, verification, analysis, reporting, regulation, and involvement by trained and licensed professionals.
There are many types of value that can be appraised, including insurable value, liquidation value, and investment value. The most common value concept used in real estate valuation is market value. In Junia Howell and Elizabeth Korver-Glenn’s original research article, Neighborhoods, Race, and the Twenty-first-century Houring Appraisal Industry, Dr. Howell and Korver-Glenn identify that “all appraisers complied with a uniform definition of market value that specified that appraisal values should be “the most probable price” in an open and fair sale.” A fair sale means that buyer and seller are each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Dr. Howell and Dr. Korver-Glenn used “predicted values” to validate their findings. Predicted values were constructed by assigning a chosen value to each explanatory variable in their study. They concluded a predicted value of $479,000 for properties located in neighborhoods where there are higher quality public schools, lower crime rates, more accessibility to public parks, and more convenient to public transportation and employment. Properties located in neighborhoods that have poor or no public schools, high crime rates, no access to public parks, no access to public transportation, and limited employment options or opportunities had concluded predicted values of $58,000 and $65,000. According to their data, buyers pay more to live in one neighborhood than another. Dr. Howell and Dr. Korver-Glenn showed through their data and the use of predicted values that the most probable price in an open and fair sale is more for properties in locations that have greater neighborhood amenities and less for properties in locations that have limited neighborhood amenities. I agree with this conclusion and so does the open market.
In Andre Perry, Jonathan Rothwell, and David Harshbarger’s 2018 report, The devaluation of assets in Black neighborhoods, The case of residential properties, the authors also discussed racial inequities within the housing market. This study also used and referred to market value. This study examined components of neighborhoods and locations including access to schools, the quality of the schools, access to businesses, including stores, restaurants, and other goods and service providers, walkability, crime, income mobility, household income, and educational attainment. This study used regression analysis to predict home values. They found that violent crime predicts significantly lower property values. They also found that school quality, the number of gas stations, and access to public transportation also affect value. In areas where school performance is weaker, commute times are longer, and access to business amenities is more limited, the value of housing is less than locations that have high performing schools, short commute times, and ample access to businesses. I agree with this conclusion and so does the open market.
In their study Dr. Howell and Dr. Korver-Glenn investigated whether racial inequality persists in the contemporary appraisal industry and, if present, how it happens. Dr. Howell’s and Dr Korver-Glenn’s search criteria was single family houses in various census tracts areas in Harris County, TX in 2015. Dr. Howell and Dr. Korver-Glenn used the words value and price interchangeably and concluded that the market value (“the most probable selling price”) in one area with better schools and less crime has higher value than properties in another area with poor performing schools and greater crime. Dr. Howell and Dr. Korver-Glenn, as well as Andre Perry, Jonathan Rothwell, and David Harshbarger’s 2018 report, concluded this was based on race, and it was the fault of the appraiser, rather than the actions of the open market. They ignored their own data and conclusions on the market value, which reflected the decisions and behaviors of knowledgeable buyers and sellers who are typically motivated, well informed, or well advised, and each acting in what he or she considers to be his or her own best interest. Their conclusions mirrored the conclusions of the various appraisers they studied. They concluded the likely selling price would be less in one location than in another. This begs the question: why is the appraisal industry accused of racial bias, but Dr. Howell, Dr Korver-Glenn, Andre Perry, Jonathan Rothwell, and David Harshbarger are not?
Like Dr. Howell, Dr Korver-Glenn, Andre Perry, Jonathan Rothwell, and David Harshbarger, appraisers reflect the market; we do not create it. It is my hope that researchers, journalist, government officials, and the public understand the vital role appraisers have in society. The systematic practice of redlining (government policy and real estate brokerage issue), loan approval or rejection (mortgage lending issue), poor performing or non-existent public schools (government policy issue), lack of affordable or any insurance (insurance industry issue), and property taxes (government policy and county taxing agency issue) are not caused by the appraiser.
The appraiser must be independent, impartial, and objective. In a mortgage transaction the appraiser evaluates the property that is to be used as collateral in a mortgage finance transaction. The appraisal is provided to the lender, who uses the appraisal as one of the many criteria used to underwrite the loan and determine if a mortgage loan will be funded or not. Contrary to what some may believe, the appraiser does not make underwriting or lending decisions.
Discrimination, including the long list of anti-cultural, anti-national, and anti-ethnic terms; is a multi-layered, multi-cultural, and multi-generational issue. The systematic, historic, and institutional causes of the various business and government policies and practices need to be addressed and cured. We do not blame the doctor for a cancer diagnosis. We do not blame the journalist as the cause of the natural disaster that is reported on the evening news. Why is the appraiser blamed for reporting on the real estate market?
Maureen Sweeney, SRA, AI-RRS
June 20, 2021