The racist home valuation divide is a real phenomenon sabotaging the wealth-building power of home ownership in black and Latin American neighborhoods, mortgage giant Freddie Mac said Monday.
The company released an analysis showing that estimated values for homes in census areas with higher proportions of black and Latin American households are more likely to be below contract price. The conclusion was based on Freddie Mac’s review of 12 million appraisals commissioned for purchase transactions from 2015 to 2020.
The valuation gap is important because it creates a barrier for Black and Latin American consumers hoping to buy homes.
“This is an ongoing issue that disproportionately affects hundreds of thousands of Black and Latin American applicants,” said Michael Bradley, Freddie Mac’s senior vice president of modeling, econometrics, data science and analytics.
A measurable race difference
Freddie Mac’s study added data points to claims that appraisers may unconsciously underestimate homes in non-white neighborhoods. Valuing a home is, of course, an inaccurate art, so Freddie compared appraisals to the purchase prices buyers were willing to pay.
The study found that homes in predominantly black and Latin American census areas were more likely to be assigned estimates below the contract price than homes in white areas. While 12.5 percent of the houses in predominantly black areas were valued for less than the contract price, only 7.4 percent of the houses in predominantly white areas had valuation deficits.
As the concentration of black or Latin American residents increases in the census areas, the assessment gap also increases, Freddie Mac noted.
And the culprit doesn’t appear to be a small number of unexplained reviewers – a large chunk of reviewers who completed assessments in both minority and non-minority areas created statistically significant loopholes, Freddie Mac said.
According to the study, the lender will continue to investigate “the full cause of the void”.
Housing industry aims for valuation gap
Freddie’s study reflects the renewed attention of the big players in the housing sector to the racial gap. In an earlier finding on the same topic, a 2018 study by the Brookings Institute found that black-owned homes were undervalued by an average of $ 48,000.
And this year, Chase pledged $ 3 million to the Appraiser Diversity Institute. The Megabank said its goal is to “root out distortions in the home appraisal process”.
In a separate statement Monday, the Appraisal Institute commended Freddie Mac for investigating the problem.
“Unconscious bias is real and exists in all industries,” said the trading group. “Assessment is part of a larger ecosystem, and assessment groups are working with consumer groups, real estate agents and brokers, banks, government agencies, think tanks and others to examine where housing inequalities may come from and what combination of solutions should be considered.”
Estimates are only part of a persistent racial divide in the US housing market. Overall, black Americans have fewer assets and are less likely to own homes – and when they own homes, they are more likely to pay higher mortgage rates.
Black homeowners often struggle to build long-term wealth because their properties are undervalued – and there is no easy way to challenge or change a valuation.