Former Vice President Joe Biden will work to create national standards for home appraisals if elected, as part of an effort to weed out racial discrimination in the real-estate industry.
Biden is the latest Democratic presidential candidate to release a comprehensive plan to address issues related to housing affordability and homelessness. Among his many proposals is one that could reshape the property appraisal industry.
Biden’s campaign said he would “establish a national standard for housing appraisals” to ensure that appraisers are adequately trained, understand the neighborhoods in which they work and “do not hold implicit biases” that influence their work.
“An objective national standard for appraisals will also make it harder for financial institutions to put pressure on appraisers to their benefit,” the campaign said in its plan this week.
Other candidates, including Sens. Bernie Sanders, an Independent of Vermont, and Elizabeth Warren of Massachusetts, former New York Mayor Mike Bloomberg, have similarly called for combatting discrimination in the real-estate industry. However, the Biden campaign is the only one so far to suggest regulation of the appraisal industry.
Appraisers, for their part, said the proposal wasn’t necessary. “National appraisal standards and ethics requirements already require appraisers to perform their work with impartiality, objectivity and independence, without bias,” said Jefferson Sherman, president of the Appraisal Institute, the largest professional association of real estate appraisers in the U.S.
Home values tend to be lower in African-American neighborhoods
Research has shown that homes located in neighborhoods primarily populated by black households tend to be valued lower than similar homes in majority-white communities. A 2018 study from the Brookings Institution, a Washington, D.C.-based nonprofit, found that homes of similar quality and with similar amenities were appraised for 23% less in majority-black neighborhoods than in neighborhoods with few black residents.
“Majority black neighborhoods do exhibit features associated with lower property values, including higher crime rates, longer commute times, and less access to high-scoring schools and well-rated restaurants,” the researchers wrote. “Yet, these factors only explain roughly half of the undervaluation of homes in black neighborhoods.”
As a result, owner-occupied homes in majority-black neighborhoods are undervalued by $48,000 per home on average, to the tune of $156 billion in lost value nationwide. This so-called “segregation tax” in black neighborhoods contributes to the persistent racial wealth gap. Other studies have also shown that it can make it more difficult to qualify for loans, because low appraisal values increased the likelihood of a mortgage application getting rejected.
Owner-occupied homes in majority-black neighborhoods are undervalued by $48,000 per home on average.
While people of color across the United States do face depressed home values relative to their white neighbors, appraisers argue their industry is not to blame for these discrepancies.
“There should not be a disparity in price between African-American neighborhoods and predominantly white neighborhoods when all other factors are equal,” said Ernie Durbin, chief valuation officer at Clarocity, a real-estate valuation technology company, who added that instead the disparity is the result of “much more systemic issues within our culture.”
“That data may be influenced by a greater cultural bias, but that’s outside the control of the appraiser,” he said.
Furthermore, Durbin noted that the study itself was based on valuations from Zillow Z, -7.983%, and not from human appraisers.
The appraisal process is already meant to root out bias
Currently standards in the appraisal industry are set by the Appraisal Foundation, a body that was created in the 1980s by Congress, but the foundation does not directly regulate appraisers. Instead, appraisers are regulated by state agencies, which are in turn regulated by the Appraisal Subcommittee of the Federal Financial Institutions Examinations Council, a body that coordinates with banking regulators.
The standards and ethical guidelines set forth by the Appraisal Foundation prohibit allowing bias against a racial or ethnic group to influence the valuation of a property. When conducting an appraisal, appraisers are directed to base their determinations on the home’s attributes and multiple sales prices from comparable listings in the same neighborhood.
‘There should not be a disparity in price between African-American neighborhoods and predominantly white neighborhoods when all other factors are equal.’
This approach could work to depress values of properties in black and Latinx neighborhoods versus white neighborhoods, since it can perpetuate historical issues such as redlining that have kept home values lower in some parts of the country. But using comps pulled from other neighborhoods in an effort to give a boost to the value of a home in a black or Hispanic neighborhood would reduce the appraisal’s capability of reflecting a home’s value accurately. That, in turn, could lead to mortgage lenders offering riskier loans.
“Appraisers do not make the market,” Sherman said. “Instead, they reflect buyer and seller behavior in real estate.”
However, some in the real-estate industry do see some value in a more federal approach to appraisal licensing and regulation.
“Having a federal licensure would smooth the process and give a federal agency a little more control,” Durbin said. “It would be great for appraisers if we only had one place we had to deal with and if there was more consistency between states and how they interpret the regulations.”
Beyond creating more rigorous national standards for appraisals, Biden’s housing plan also calls for the creation of new tax credits for first-time homeowners and renters, establishing a national bill of rights for homeowners and expanding regulations on mortgage lenders and insurers, among other initiatives.
The proposals set forth in Biden’s housing plan would be achieved through a mix of legislation and executive actions, the campaign said. However, analysts have previously expressed skepticism over the likelihood of housing reform legislations clearing Congress due to partisan gridlock.
Published by Market Watch