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The housing market is booming but remains deeply unequal

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The current housing market features plenty of prospective buyers but few sellers, and is likely to make housing inequality and the racial wealth gap much worse. Politicians are beginning to grapple with this problem. President Biden came to office on a pledge to make racial equity central to his Build Back Better agenda, and Sen. Elizabeth Warren (D-Mass.) even featured corrections to redlining in her presidential campaign. Congress has also begun to address legacies of redlining and discussions of how to best mitigate their damage, and federal action around housing equity is increasingly vigorous.

Yet there is another, far less-discussed, but no less important tool perpetuating housing inequality: the practice of real estate appraisals. Crucially, the racial wealth gap is the racial housing gap. For every one dollar of equity the median Black homeowner in America has, the median White homeowner has nearly two dollars, according to a Brookings Institution report. Real estate appraisals were designed to support White homeownership and disadvantage minorities — and they still do today.

The business of home finance, ownership and improvement depends on home appraisal. When you buy a house or refinance, the mortgage company needs to know the value to be sure it is not lending more than the property is worth. An appraiser visits and studies the house to assess its size, condition and neighborhood, then compares it to other sales in the area.

But it wasn’t always this way. Until the 1920s, real estate agents made calculations of home value based on their experience and a few folk principles of value. One scholar compared it to attempts at alchemy without understanding chemistry. Hoping to improve on this process, real estate professionals teamed up with Richard Ely, an economist who helped found the American Economics Association, and who promised an economic science of land value.

The method they created was based on White supremacy and forged in response to the great migration of African Americans to northern cities. Ely was raised a rural northern progressive. He led the Institute for Research in Land Economics and Public Utilities at Northwestern University in metro Chicago and had little interaction with African Americans before the great migration. He thought Black southerners had to show their “fitness” for land and homeownership — that tenant farming was more appropriate for them.

These views about Black unworthiness and riskiness were prevailing opinions among White real estate leaders at the time. The National Association of Real Estate Boards (NAREB, now NAR)’s 1924 code of ethics stated, “A Realtor should never be instrumental in introducing into a neighborhood a character of property or occupancy, members of any race or nationality … whose presence will clearly be detrimental to property values.” Ely’s institute gave these racialized ideas of real estate the imprimatur of an academic discipline.

His research, guided by these sentiments, led to introduction of the modern real estate appraisal. Frederick Babcock, an Ely associate, published the first practical guide to appraisal for the institute in 1924. He wrote, “Residential values are affected by racial and religious factors …[T]he habits, the character, the race, the movements, and the very moods of people are the ultimate factors of real estate value.”

When the housing and banking industries collapsed during the Great Depression, the federal government worked to restructure the home finance sector. The newly established Home Owners’ Loan Corporation would clear banks’ balance sheets and keep homeowners in their houses. The Federal Housing Administration would reorganize the housing sector and change practices to prevent another housing crisis in the future. Both agencies looked to experts to craft their policies — the same Chicagoans in the orbit of Ely’s institute and NAREB. These men helped establish federal policies based on the institute’s work from the 1920s, promoting segregation and embedding racial hierarchy in land valuation.

In fact, Babcock wrote the FHA “Underwriting Manual,” which was the basis for evaluating properties for federal mortgage insurance. He wrote that the location of a property and its economic life would be negatively affected by “threatening or possible infiltration of inharmonious racial groups.”

One of Babcock’s associates at the FHA was Homer Hoyt, a real estate economist. In his influential economic history, “One-Hundred Years of Land Values in Chicago,” he included a list that ranked the races and nationalities “with respect to their beneficial effect on land values.” It put the English and Germans first, African Americans second-to-last and Mexicans last.

These people — Ely, Babcock, Hoyt and others — were the architects of redlining, which in turn depended on real estate appraisals. They asked leading appraisers in local communities which neighborhoods were desirable, then asked rank-and-file appraisers to imagine White buyers evaluating homes in homogeneous White neighborhoods as the standard case for computing sales value. Local appraisers deemed neighborhoods “hazardous” for HOLC because as few as three Black families resided in an otherwise desirable neighborhood — as they did in Tacoma, Wash.

Babcock and Hoyt did not just set policy, though, they trained a generation of private appraisers in two professional organizations created in the 1930s. Through publications and training seminars, HOLC and FHA staff taught members of the Society of Residential Appraisers (SRA) and the American Institute of Real Estate Appraisers (AIREA) how to follow these new policies. The agencies thus established segregationist practices in the private sector when economic growth after World War II meant a resurgence in private lending.

Appraisers maintained these practices even after the Fair Housing Act of 1968 outlawed housing discrimination. In 1976, the Department of Justice filed suit against AIREA and SRA for violating fair housing law. They negotiated a settlement that changed appraisers’ training materials and created affirmative action measures within the industry. As important as those reforms were, they still left appraisers’ preference for homogeneous neighborhoods intact when they search for comparable sales.

Sociologist Elizabeth Korver-Glenn has shown that the legacy of excluding “inharmonious races” endures. White-owned homes are compared with houses in predominantly White neighborhoods, despite differences in condition. Black-owned homes are compared with houses in predominantly Black neighborhoods, differences in condition notwithstanding. Brookings scholar Andre Perry demonstrates how this reinforces the continual undervaluation of Black home values. These biases and the racial fundamentals of real estate value are not exceptions to or failures of the system, they are foundational to the system of real estate finance.

Home appraisal lacks strong regulatory oversight. This leaves the process opaque, almost invisible to homeowners who must simply hope appraisers use favorable comparable sales when valuing their homes as they refinance or rehab. It gives wide discretion to appraisers who may make valuation choices that come not from racial hatred but the systemic bias built into American society. It makes the appraisal profession responsive to mortgage companies and real estate brokers, the institutions that created the profession under the same conditions of racial inequality, rather than to the national economy or notions of public good.

Simply put, the federal government and state attorneys general cannot dismantle the historical legacies and ongoing practices of redlining until they address the key pieces that helped create it. The science of appraisal is one of those seemingly colorblind elements that, without rigorous controls, reinforces racial bias and inequality in a frothy housing market. This expands the racial wealth gap and makes us all worse off. The Appraisal Institute favors modest reform proposed in Congress, but the sector needs significant restructuring as part of a fundamental rethinking of an unequal housing market.

Published by The Washington Post

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