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For Black homeowners, a common conundrum with appraisals

Lorenzo and Gwen Mitchell pose with their children — Sia, Zora and Prishad — in front of their Park Hill home in Denver, Colo. The Mitchells experienced racial bias when having their home appraised.
Lorenzo and Gwen Mitchell pose with their children — Sia, Zora and Prishad — in front of their Park Hill home in Denver, Colo. The Mitchells experienced racial bias when having their home appraised. (Stephen Speranza for The Washington Post)

When Gwen and Lorenzo Mitchell decided last spring to remodel their Denver home they thought a home-equity loan would be the smartest way to finance it.

The couple’s Park Hill neighborhood has seen home values rise sharply over the past few years as property prices across the city have soared. Median Denver home prices reached $478,500 in December, up 21 percent since 2017, according to Redfin data, ranking the city among the strongest housing markets in the country.

After securing a lender, the couple scheduled an appraiser and began researching home values in their neighborhood, a tree-lined community dotted with Craftsman and Tudor-style homes just east of downtown Denver. Their three-bedroom property sits in a racially diverse area where homes typically sell for $450,000 to $550,000. The couple estimated that their home would appraise for about $500,000.

But the appraiser, who visited the home when Lorenzo was there with the couple’s three young children, assigned a value of $405,000. Surprised by the lower figure, they took a closer look at the results and discovered that all the comparable sales data used by the appraiser was taken from north of Martin Luther King Boulevard — a predominantly Black neighborhood — even though their home is south of the boulevard.

The ‘heartbreaking’ decrease in Black homeownership

“Because I’m Black, we realized he picked the houses from the Black side of Park Hill,” says Lorenzo, an IT engineer and technology developer. “That was the first red flag.”

Dismayed, the couple scheduled a second appraisal. But this time they decided to experiment: Gwen, who is White, remained alone at the home to greet the appraiser.

The second appraiser gave the home a value of $550,000 — a $145,000 increase from the first appraisal.

“We didn’t change the house at all,” says Gwen, a clinical psychologist and associate professor at University of Denver. “We didn’t paint any walls or mow the lawn or do anything different.”

Though they were relieved the higher appraisal helped secure the loan, the couple says the experience was unsettling.

“Race obviously played a role in how we were treated,” Gwen says. “But what’s deflating is that this experience put a dollar figure on it.”

Increased scrutiny

Fair-housing advocates have long pointed to evidence of persistent racial discrimination in housing.

Decades of research have revealed bias in mortgage lending, including the harmful legacy of redlining. Undercover investigations have exposed pervasive discrimination by some real estate brokers, with agents being accused of steering Black home buyers away from White areas or denying them basic information to make a home purchase easier.

Communities of color were also targeted with risky subprime loans at the height of the housing boom in 2006, studies show, contributing to foreclosure rates nearly twice as high as for White people when the market collapsed.

Like banks and brokers, home appraisers must abide by the Fair Housing Act of 1968 which outlawed discrimination based on race, religion, national origin or gender. But the industry is coming under increased scrutiny as Black homeowners complain that their homes are being appraised for less than those of their White neighbors.

The accusations of bias come as the country continues to reckon with the legacy of generations of housing discrimination and its long-term effects on Black homeownership rates.

Today, about 42 percent of Black households own a home compared with 72 percent for Whites, Census Bureau data shows, a gap not seen in nearly 50 years.

“As an industry we’re all concerned about the homeownership gap for Blacks and we need to roll up our sleeves and figure out what those barriers are,” says Bryan Greene, vice president of policy advocacy for the National Association of Realtors, who oversaw enforcement of the Fair Housing Act at the Department of Housing and Urban Development before joining the realty group. “As we dedicate more attention to that, it’s going to uncover issues throughout the entire industry that need our attention and that includes the appraisal industry.”

Stephen Richmond says he resorted to having a White neighbor stand in for him during an appraisal for the four-bedroom Colonial-style home he shares with his wife and three kids in Bloomfield, Conn., a suburb of Hartford. He moved into the newly built home in 2010 and decided to take advantage of lower interest rates and refinance in 2014.

He was at home during the first visit from an appraiser who ultimately gave the three-quarter-acre property a value of $340,000. Suspicious that the estimate was low, he scheduled another appraisal. But before the new appraiser arrived he took down family photos from the mantel and anything on the walls that could reveal his race. He then asked a White neighbor to greet the appraiser for him. He says the second appraiser gave the home a value of just over $400,000.

“It’s too easy to say it was insulting because we’ve normalized this kind of bias so this wasn’t entirely unexpected,” says Richmond, 44, an engineer who spent 20 years in the aerospace industry. “But this kind of experience not only robs you of the ability to refinance, but also affects opportunities at building generational wealth,” he says. “And that’s where racial disparities start.”

More state oversight

There is no national database of discrimination complaints against appraisers. The few that were filed to the Department of Housing and Urban Development totaled just six in 2020 compared with three in 2019.

An analysis by the American Enterprise Institute, a public-policy think tank, found that allegations of intentional or unintentional racial bias in appraisals on refinance loans were “uncommon and not systemic.” The group compiled hundreds of thousands of appraisals on transactions that actually closed. The research combines data from several sources, including Collateral Risk Network’s survey of Appraisal Management Companies and Lenders, Home Mortgage Disclosure Act data, and AEI Housing Center’s national housing market database.

But fair housing advocates say that it is not uncommon for bias complaints to go unreported by discouraged homeowners and that consumers often don’t recognize when they are being discriminated against.

“When buyers of color face discrimination in the marketplace, it can discourage them from the whole process,” said Lisa Rice, president and chief executive of the National Fair Housing Alliance. She says compiling data from closed property sales does not take into account home deals that fell apart after a lower appraisal. “And research shows that in many cases, especially when the appraisal differences are slight, consumers won’t realize that bias could have been a factor in lowering the value of their homes,” adds Rice.

Despite the lack of hard data on discrimination complaints, some states are tightening oversight of the industry as anecdotal evidence of bias piles up.

One home, a lifetime of impact

Lawmakers in Illinois are considering an amendment to the state’s Real Estate License Act that would make it easier to bring civil claims for damages in cases of discrimination in property valuations.

The Auditor’s Office in Franklin County, Ohio, has set up a commission to help eliminate inequalities in the housing appraisal process after a rise in complaints of unfair treatment from Black and other minority homeowners.

In New Jersey, policymakers have introduced a bill that would revoke or suspend the license of any appraiser found engaging in a discriminatory appraisal based on race or national origin.

“There’s a cost to devaluing property,” says New Jersey Assemblywoman Angela McKnight, a Democrat who is sponsoring the legislation. “Every homeowner should have the right to be given the true worth of their home.”

Robert Schwemm, a professor emeritus of law at the University of Kentucky, says proving discrimination in appraisals is difficult, but tighter oversight at the state level could increase awareness.

“Homeowners will have a better understanding of their rights when it comes to the appraisal process,” says Schwemm, author of “Housing Discrimination: Law and Litigation. “And the added level of scrutiny will make the industry more aware of the stakes.”

During his campaign, President Biden pledged to create national standards for home appraisals as part of an effort to eliminate racial discrimination in the real estate industry.

The measures would “ensure appraisers have adequate training and a full appreciation for neighborhoods and do not hold implicit biases because of a lack of community understanding,” the campaign said.

The effort is part of a broader housing plan aimed at lifting minority homeownership rates by calling for tax credits for first-time home buyers and expanding regulations on mortgage lenders and insurers, among other measures.

Industry changes

To determine a property’s value, appraisers assess its condition, size and location, among other factors. They also use similar properties that have been recently sold as a key basis for comparison.

Appraisers are regulated by state agencies, which are then regulated by the appraisal subcommittee of the Federal Financial Institutions Examinations Council, a body that coordinates with banking regulators.

While appraisers generally defend their practice and say instances of alleged bias are still rare, the industry has taken note of the complaints.

Trade groups such as the Appraisal Institute and the American Society of Appraisers (ASA) have introduced new initiatives to increase diversity among its ranks and combat bias in the profession.

Bank programs seek to widen the path to Black homeownership

“You’ve got to recognize that bias exists, especially unconscious bias,” says Rodman Schley, president of the Appraisal Institute, which counts more than 17,000 members. “Anyone who says that it doesn’t exist is simply wrong.”

Schley says his organization’s code of ethics already prohibits racial discrimination, but new programs such as the Appraiser Diversity Pipeline Initiative that is being run with Fannie Mae and the National Urban League, and the Minorities and Women Course Scholarship program under the initiative are aimed at diversifying the industry.

“Every industry benefits from diversity, that’s just a fact,” he says. “So identifying the problems and being a part of the conversation toward a solution is important.”

Johnnie White, chief executive of the American Society of Appraisers, says his organization is also developing training on the topic of unconscious bias. But he says tackling discrimination concerns needs to involve the entire housing finance industry.

“Any effort to uncover whether and to what extent aspects of the appraisal process may contribute to disparate impacts on minority communities must also include lenders, guarantors and secondary market participants as well,” White says. “This is an issue that all contributors to the process must address.”

The Appraisal Foundation, which announced its actions in the wake of the killing of George Floyd, created a committee to promote more diversity in the valuation profession and education requirements that include specific content to address bias and discrimination in appraisals.

“Recent tragedies across our nation have highlighted how much more work we need to do to combat systematic racism in the United States,” the foundation’s president, Dave Bunton, said in a statement announcing the new initiatives. “And that extends to the housing industry.”

Financial educator and author Tiffany Aliche says devaluing the properties of Black homeowners also presents obstacles toward building equity, which works to perpetuate income inequality. That’s especially true in predominantly Black neighborhoods where the legacy of redlining can still be found, she says.

A 2018 study from the Brookings Institution found that homes in majority Black neighborhoods were appraised for 23 percent less than properties in mostly White neighborhoods — even when the homes were of similar quality and with similar amenities. The study estimated that homes in majority-Black neighborhoods are undervalued by $48,000 per home on average, leading to a $156 billion cumulative loss in value nationwide.

“This is what contributes to a persistent racial wealth gap,” says Aliche, who helped push for the new oversight measures in New Jersey after an experience with her home in Newark, a predominantly Black city about 15 miles from Manhattan that is gentrifying after decades of decay.

Last year, while applying for a cash-out refinance of the five-bedroom home in the city’s historic district that she and her husband own, the appraiser valued the property at $390,000 despite recent upgrades that added new plumbing and electric, she says.

Disappointed, she asked a local real estate agent to research comparable sales of homes nearby and the broker determined the appraisal was roughly $30,000 to $40,000 lower than it should be. An independent appraiser also reviewed the housing data and agreed with the broker that the first appraisal was low, she says.

“It became clear the home was being appraised for the reputation of Newark, not its condition or amenities,” says Aliche. “For many Americans, our wealth is directly connected to homeownership so it’s impossible to close the wealth gap for Black Americans when your home is undervalued.”