Appraisal Bias Now Touches More Communities

Evidence from the Appraised report shows this discrimination has seeped into the appraisal industry with data showing that East Asian neighborhoods decreased relative to their white counterparts during the pandemic period.

Junia Howell, a report co-author, was shocked to see this bias develop so quickly and is now working to investigate this effect even further.

“There was an enormous rise, as we all know, of anti-Chinese hate crimes in this time period because of the associations that were being made politically between COVID-19 and the Chinese population,” Howell said. “Obviously, there were some very high-profile shootings, high- profile muggings, and all sorts of really horrendous things. And it's very, very interesting that it’s reflected in this seemingly very distinct industry of housing appraisals.”

Former Equals

Prior to the pandemic, East and Southern Asian neighborhoods were appraised at levels comparable to their white counterparts. These communities were assumed to be more wealthy, because when East and Southern Asians were finally allowed to immigrate to the U.S., only workers with high education levels, socioeconomic status, or skills deemed highly valuable by the government were granted visas. This fostered racialized assumptions that these Asian communities were successful and therefore their neighborhoods were similar or higher in value than white neighborhoods.

The assumption that Asian Americans belong to a wealthier class than other ethnicities is a negative stereotype that prevents them from receiving necessary help, according to Hope Atuel, executive director of Asian Real Estate Association of America (AREAA).

“It’s like the movie ‘Crazy, Rich Asians’ has perpetuated this. I love the movie, but must say we might all be crazy, but we’re not all rich,” Atuel said.

What is particularly shocking is once the pandemic set in, home values in East Asian neighborhoods decreased relative to their white counterparts. Although the report neglects to mention how much appraisal values have dropped off or where this has taken place, data on the website suggests this was most prevalent within Californian metros such as San Jose, Los Angeles, Sacramento, San Diego, and Riverside. The report states that racist stereotypes negatively affected home prices in East Asian communities in ways they had not prior to the pandemic.

“They're assuming buyers are going to be less likely or willing to move into East Asian communities, and they're making that a part of their assessment,” Howell said. “It probably had less to do with appraisers saying, ‘Oh, I don't like this area as much’ and more to do with recognizing the general push against certain communities and reflecting that in their appraisals. But, I would still call that a racist assessment.”

Longtime Discrimination

Other subcommunities, such as Southeast Asian and Pacific Islanders, have dealt with discrimination and progressive devaluing of their land for generations. The Appraised report shows, on average, homes in these communities are appraised at $305,000, yet houses in white neighborhoods in these same metropolitan areas are appraised more than four times as much at $1,268,000.

“In the United States the creation of wealth is driven by homeownership, so if values of the homes are degraded, then it's furthering the problem of wealth disparity,” Atuel said. “There’s already a disparity in homeownership rates amongst certain Asian subcommunities and that’s being layered with lowered appraisals, so it creates more of a wealth gap.”

Less Hispanic Bias

This is the opposite of what’s happening in Hispanic communities. The Mortgage Fairness report shows that the higher the concentration of Hispanic residents, the fairer the mortgage market is to Hispanics. Saleh believes this may have to do with the upward economic mobility that the Hispanic community has exhibited over the last 30 years, but also that there are more likely to be mortgage brokers and originators owned by Hispanic proprietors serving those communities.

Evidence from the appraiser study also shows the appraisal gap between white communities and all underserved communities is accelerating. From 1980 to 2015, the neighborhood racial gap in appraisals expanded by $6,000 a year. Yet, in this last decade, this gap grew by $18,000 a year.

Proposed Resolutions

As more researchers uncover these hidden biases, they are also proposing solutions to counteract them.

The fact is that the current system for evaluating a borrower’s readiness to acquire a mortgage is not applicable to certain communities who have dealt with historical injustices and negative stereotypes. Or, their cultures are not aligned with how the mortgage industry evaluates borrowers’ eligibility. For example, Islam forbids its followers from paying or charging interest in transactions, so many cannot get a mortgage even if they are financially eligible. Except for only a few banks in America, most do not offer product solutions for these people (see Gated Communities episode: Financing According To Faith).

For the betterment of the mortgage industry and the country’s overall economy, it would be wise to make mortgage eligibility inclusive to as many people as possible. It’s a simple notion: The more eligible borrowers there are, the more potential for higher origination volume.

Howell has proposed a unique solution to the appraisal gap problem this country is facing that may just remedy the problem for all underserved communities. But it does involve overhauling the way appraisals are conducted..

Instead of relying on past valuations and improvements done on the house, Howell recommends using all the important components of a house to come up with a valuation.

“The approach is a component-based approach that looks at each piece of the physical structure of the dwelling. So the windows, the framing, the roof, the foundation, those are the components,” Howell said.

The appraiser would then analyze the cost and durability of these materials to determine the value. For example, when was this put in place? How much did it cost when it was actually put in place? Was that a 100 years ago or five years ago? How much did it cost then for both the labor and the natural resources as well as the infrastructure to get it there? How long do we expect it to last?

There are questions to consider when conducting an appraisal with this method, but Eruka is working on pairing this method with technology that has object identification to be able to take a picture or a video of the house structure and help estimate all the answers.

“It's a really radical way of rethinking how we're sharing this cost and how we're passing it along,” Howell said. “But what it does is enable the majority of the cost of housing to shift from paying for a mortgage towards paying for the upkeep of the house. Now you’re looking at what it actually costs to live somewhere.”

Unfortunately, these issues don’t come with a simple solution. But those companies who pioneer the way to change and offer alternative solutions to those who have been ignored or discarded by the rest of the industry will become very valuable.

Peeling An Onion

“Ensuring unconscious bias doesn’t play a role in appraisals and seeking broader solutions to DEI [diversity, equity and inclusion] in housing is a priority for the Appraisal Institute,” said Appraisal Institute President Craig Steinley. “Creating a more equitable housing environment in this country will take solutions advanced by real estate brokers/agents, banks, government agencies, appraisers and others.”

The Appraisal Institute has been amplifying and accelerating diversity, equity and inclusion (DEI) initiatives and partnerships to bring about positive change, Steinley said. The organization is also creating a Practical Applications of Real Estate Appraisal program (AI PAREA), which provides an alternative to the traditional supervisor and trainee model for experience, and they are creating a seminar on valuation bias.

“All of these stereotypes you start uncovering, it's like peeling an onion, right? As you get closer to the core, you're crying,” Atuel said.