Home appraisals drive America’s racial wealth gap — 95% of Philly’s appraisers are white.

Racial bias in the appraisal industry — an industry that is dominated by white people — is an understudied contributor to historical and ongoing segregation and wealth disparities in Philadelphia and across the United States.

President Biden’s recently released Memorandum on Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies addresses the subject, stating:

“During the 20th century, Federal, State, and local governments systematically implemented racially discriminatory housing policies that contributed to segregated neighborhoods and inhibited equal opportunity and the chance to build wealth for Black, Latino, Asian American and Pacific Islander, and Native American families, and other underserved communities. Ongoing legacies of residential segregation and discrimination remain ever-present in our society. These include a racial gap in homeownership; a persistent undervaluation of properties owned by families of color…”

President Biden’s statement notes the role of appraisals in undervaluing properties owned by non-white families, which directly contributes to dramatic wealth disparities in the America. Black and Latino families have approximately one-tenth the wealth of white families and much of this gap is the result of wide racial disparities in the homeownership rate and disparities in the equity white and non-white families have in their homes. In 2019, 73 percent of white families owned their homes compared to 42 percent of Black and 47 percent of Latino families. But this is not a problem that just affects individual families. Entire neighborhoods that are predominantly non-white often are subject to undervalued appraisals, adversely affecting white and non-white families in those communities.

It has been argued that this undervaluation is not related to racial bias on the part of appraisers because all an appraiser does is establish a value based on a well-established set of rules. But it is an inexact science tasked with producing an objective estimate of value and it is the appraiser’s job to determine that market value. So how could undervaluation happen?

In establishing a property’s value, an appraiser typically selects three “comps.” Comps are recent sales within a given distance of the property being valued. There are often multiple usable comps and the appraiser could select the lower valued sales, yielding a lower appraised value. Then there are “adjustments” for differences between the comp and the property being valued (e.g., differences between the property being valued and the comps’ condition). While there are guidelines for adjustments, they can make a difference in the value. Accordingly, there are subjective elements of this objective process – consciously or unconsciously – that can introduce bias into an appraisal.

One possible source of bias is that an appraiser may be of a different race or ethnicity than the person whose home is being appraised. An appraiser may also be from a neighborhood that is very different from the area where the appraised home is located and, therefore, be unfamiliar with homes in that neighborhood.

The Biden memo notes some of the many factors that have created our nation’s segregated communities and the costs of that segregation to many families. One factor not examined in this memo is the racial composition of the appraisal workforce.

Across the country, Census occupation data show that 86% of real estate appraisers are non-Hispanic white, 14% are Black or Brown. This compares to 32% in banking and 32% of real estate brokers and agents who are Black or Brown. The workforce in other occupations is 37% Black or brown. The Philadelphia region is even more unbalanced. Here, 95% of appraisers/assessors are white, not-Hispanic and 5% Black or brown — that compares to 22% in real estate and 32% in banking.

In recent years the real estate and lending industries have recognized the importance of a diverse workforce. Last year, the US House Committee on Financial Services concluded, based on testimony and studies from researchers at McKinsey and Co. as well as the Harvard Business Review, that a diverse workforce  increases profitability, enhances employee engagement and innovation, and is associated with firm growth in market share. Diversity is a win-win for consumers and industry alike.

An accurate appraisal is important to buyers, sellers, refinancers and lenders. To the buyer this represents what is presumed to be the value of the purchase they are making. To the seller it enables them to get a fair price for their property. For homeowners seeking to refinance, this enhances equity in their homes. For lenders they can be assured the home is ample collateral for the loan.

In Philadelphia and communities around the nation, it is time to follow the President’s lead to eliminate all discrimination in the purchase, sale, financing, insuring, and valuation of our homes. One step would be enhanced diversity of the appraisal industry. We look forward to investigative hearings on this issue that the Philadelphia City Council will be holding this Spring.

Councilmember Cherelle L. Parker is a Majority Leader and represents Philadelphia’s 9th District; Ira Goldstein is the president of Policy Solutions at Reinvestment Fund and Gregory D. Squires is a professor of sociology at George Washington University. 

WHYY is one of over 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push towards economic justice. Follow us at @BrokeInPhilly.