Building home equity through decades of mortgage payments is a primary means of creating generational wealth in America. But in a matter of hours, racial bias baked-in to the home appraisal process can take a bite of hard-earned home equity, especially for homeowners of color.
The Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) was formed by the Biden administration in June 2021 to “develop a transformative set of actions to root out racial and ethnic bias in home valuations.” The task force is comprised of members from 13 government agencies and co-chaired by HUD Secretary Marcia Fudge and Domestic Policy Advisor Susan Rice.
Today, PAVE announced an action plan for delivering on its mission that takes a “whole-of-government” approach.
The PAVE Action Plan is built on five pillars:
- Make the appraisal industry more accountable
- Empower consumers with information and assistance
- Prevent algorithmic bias in home valuation
- Cultivate an appraiser profession that is well-trained and looks like the communities it serves
- Leverage federal data and expertise to inform policy, practice, and research on an appraisal basis.
The action plan is designed not only to create a more equitable home appraisal system, but to empower homeowners when they feel an appraisal is lower than expected due to racial bias.
“Since his very first day in office, President Biden has made advancing equity and racial justice a top priority across the entire federal government,” said Domestic Policy Advisor Susan Rice. “This PAVE Task Force took that responsibility seriously. We have a long way to go, but the steps laid out in this Action Plan will help our country reduce bias in home valuations, narrow the racial wealth gap, and deliver a stronger and more equitable future for all Americans.”
Home appraisal – or valuation – is an assessment of a home’s current market value performed by a licensed expert. It’s a mandatory part of the loan process because mortgage lenders won’t approve loans based on a higher value than the home is worth.
An appraisal is different from a home inspection, which evaluates the physical condition of a property.
For homeowners, the home appraisal is a crucial piece in determining how much they will make in a home sale. A low appraisal can shave tens of thousands of dollars off of a sales price and erode decades of hard-earned equity.
A recent study from Freddie Mac found that home appraisals in majority-Black and majority-Latino neighborhoods were about twice as likely to come in low compared to appraisals in majority white neighborhoods. And a 2018 study by Brookings Metropolitan Policy Program found that, on average, homes in Black neighborhoods are undervalued by $48,000 per home.
In a case that made national news in September 2021, Black homeowners in Ohio had several appraisals come in $40,000 short of what homebuyers were offering. The couple decided to redecorate their home by replacing their personal items – including art and family photos – with photos of their white neighbors.
The next appraisal came in $92,000 higher than the first one.
While this is among the most extreme cases (at least publicly), it points to larger issues in the home appraisal process.
A White House fact sheet on the PAVE Action Plan points to a few driving factors of racial bias in home valuations:
- Biased data in Automated Valuation Models (AVM) leftover from past discrimination
- The appraiser workforce is roughly 97% white – one of the least diverse workforces in the country
- Lack of data to better research, understand, and address appraisal bias
Well, the gears of government move slowly, so today’s homebuyers may not see an immediate effect. But it’s worth keeping an eye on because home appraisals impact homebuyers in a few ways.
- They provide a baseline market value for homes, thereby influencing sales prices
- Appraisals have a knack of derailing home sales
Earlier, we mentioned that lenders will only approve loans based on the appraised value of a home. For instance, if a loan program requires 5% down, the final loan amount is 95% of the purchase price, unless the appraised value comes in lower.
So if a homebuyer has an offer accepted for $450,000 and the home appraisal comes in low at $425,000, there’s a problem. Suddenly, in the example above, they can only get a loan for 95% of $425,000, equaling $403,750.
If the seller doesn’t reduce the price, the buyer must come up with over $23,750 in additional cash. No small number for a buyer that was only planning on the original down payment and closing costs.
By addressing the racial bias in home valuations, the PAVE Action Plan has the potential to create a more fair and accurate appraisal process for all homebuyers and homeowners.