The latest findings from Freddie Mac's Research Note, provided evidence of a definite gap in home purchase appraisals in minority neighborhoods. Research also shows that the appraisal valuation gap is even greater for Black and Latino individuals.
Freddie Mac examined 12 million appraisals for purchase transactions that were received between 2015 and 2020 through its Uniform Collateral Data Portal. The company found that a large portion of appraisers who completed appraisals in both minority and non-minority areas generated statistically significant gaps.
Additionally, the research showed that properties in Black and Latino tracts receive appraisal values lower than the contract price more often than those in White tracts. It was found that 12.5% of the properties in Black tracts receive appraisal values lower than the contract price compared to 7.4% for those in White tracts, leading to a gap of 5.2%. Meanwhile, as the population of Latino individuals increases, the appraisal gap for properties in Latino tracts increases from 7.7% to 9.4%.
“An appraisal falling below the contracted sale price may allow a buyer to renegotiate with a seller, but it could also mean families might miss out on the full wealth-building benefits of homeownership or may be unable to get the financing needed to achieve the American Dream in the first place. This is a persistent problem that disproportionately impacts hundreds of thousands of Black and Latino applicants,” said Michael Bradley, senior vice president of modeling, econometrics, data science, and analytics in Freddie Mac's Single-Family division. “Our research marks the beginning of a comprehensive effort to better understand the key drivers contributing to the appraisal gap. Our goal is to develop solutions to this persistent problem, including appraisal best practices, uniform standards for automated valuation models, enhanced consumer disclosures, improved value processes, and revised fair lending exam procedures and risk assessments.”
“Equity in housing is a critical issue and one Freddie Mac takes very seriously,” said Pamela Perry, single-family vice president of equitable housing at Freddie Mac. “We're uniquely positioned to investigate potential gaps and provide data-driven research like this to advance solutions that promote equity across the valuation process. In addition, we are committed to engaging with the Appraisal Institute to review the analysis in-depth so that we can work together in identifying causes and solutions.”