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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 growing body of research.
Mortgage giant Freddie Mac, for instance, recently concluded an 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 consumers hoping to buy homes. What’s more, it has a lasting impact on the overall net worth of these consumers — the ramifications of which can extend through generations.
Minority group homeownership data and statistics
- In mostly Black census tracts, 12.5 percent of homes appraised at a value below the sale price, compared to just 7.4 percent of homes in predominantly White areas, Freddie Mac reports.
- In predominantly Latino neighborhoods, fully 15.4 percent of homes for sale were appraised at below the sale price, per Freddie Mac.
- The Black homeownership rate in the fourth quarter of 2022 was 44.9 percent, compared to 74.5 percent for White Americans, according to the U.S. Census Bureau.
- The Hispanic homeownership rate in Q4 2022 was 48.5 percent, the Census Bureau reports.
- Homes in Black neighborhoods are valued at 21-to-23 percent 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 percent lower in mostly Black neighborhoods compared to homes in neighborhoods where less than 1 percent of the population is Black, Brookings estimates.
A measurable racial gap
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 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 study 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 percent of homes in mostly Black areas were appraised for less than the contract price, just 7.4 percent of homes in mostly White tracts experienced appraisal shortfalls.
This is a persistent problem that disproportionately impacts hundreds of thousands of Black and Latino applicants.
— Michael Bradleysenior vice president of modeling, econometrics, data science and analytics
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.
Its study says the lender will continue to examine “the full root cause of the gap.”
Housing industry takes aim at appraisal gap
The Freddie Mac report reflects new attention to the racial gap in the housing sector.
A 2018 study, “The devaluation of assets in Black neighborhoods,” 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 2022 unearthed more details. It found that homes in Black neighborhoods are valued at 21 percent to 23 percent 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 percent lower in mostly Black neighborhoods compared to homes in neighborhoods where less than 1 percent of the population is Black.
The mortgage and appraisal industry is acknowledging the issue. Banking giant JP Morgan Chase has 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.”
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.”
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.
How does the appraisal gap affect minority groups?
The appraisal gap is a classic chicken-and-egg question. Are homes in Black and Brown neighborhoods undervalued because those groups have less wealth? Or is undervaluation of homes holding back African Americans and Latinos from achieving greater prosperity? Or is it a mix of both?
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 third quarter of 2022, White Americans owned assets worth $124.5 trillion. Black Americans had $8 trillion in assets, while Hispanics held $5.5 trillion.
In another illustration of the divide, data from the Fed’s “Survey of Consumer Finances” says White households had an average net worth of $952,910, compared to $140,520 for Black households and $192,170 for Latino households (as of 2019).
Employment rates are another dreary statistic. Joblessness for Black Americans is routinely much higher than for White Americans. In January 2023, the jobless rate for African Americans was 5.4 percent, compared to just 3.1 percent for White workers, according to the U.S. Labor Department. That of course impacts the ability to save and invest, as well as 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 six 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.
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.
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 loans, 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.
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.