Increasing Diversity in the Appraisal Profession Combined with Short-Term Solutions Can Help Address Valuation Bias for Homeowners of Color
The home appraisal industry is among the nation’s least diverse industries, and its racial and ethnic homogeneity has been linked to reports of undervaluation and appraisal bias in Black and Hispanic neighborhoods. Remedying this bias is critical, as the racial and ethnic homeownership rate gaps remain wide and are expected to persist without policy intervention.
Although the field has taken steps toward increasing the racial and ethnic diversity of its workforce, these changes are long term and require structural changes to the certification process. In the short term, the real estate sector should include other tools, such as expanding and enhancing automated valuation models (AVMs) or eliminating the reliance on a neighborhood’s racial and ethnic makeup to identify comparable homes, that could have a more immediate impact.
The need for change is critical. In addition to the homeownership gap, disparities in home values mean that Black and Hispanic homeowners accumulate less housing wealth than white homeowners, reducing what can be passed down to future generations. A comprehensive toolkit that incorporates immediate and long-term solutions is necessary to address valuation bias, support homeownership, and ensure the sustainable accumulation and transfer of wealth for all households.
More diversity in the appraiser profession may help address valuation bias
Compared with the private sector overall, the real estate sector lacks diversity. Three in four employees in real estate are white, compared with 63 percent in the private sector. But according to Urban Institute calculations of 2019 American Community Survey data, this gap is even more pronounced for appraisers, as 89 percent of all property appraisers and assessors are white while only 2 percent are Black and 5 percent are Hispanic. These estimates are consistent with industry and occupation reports by the Bureau of Labor Statistics.
Addressing the lack of diversity in the profession could improve outcomes for Black and Hispanic communities, as studies in other fields have suggested. In health care, pairing Black doctors with Black patients has been shown to reduce Black patients’ risk of death from heart disease. In education, schools with a higher share of Hispanic teachers also have a higher percentage of Hispanic students taking Advanced Placement courses.
Taking steps to diversify the appraiser profession would be timely, as the profession’s median age is 52, nearly a decade older than for the workforce overall. But to do so, structural changes to the certification process are needed.
The appraiser pipeline relies on the supervisor-trainee model, which often results in white appraisers supervising white trainees from their personal or professional networks. New appraisers must also complete at least 1,500 hours (or 3,000 hours for a general certification) to become certified and must pay fees associated with the application and any required education. For those considering becoming an appraiser, it may be easier to choose another profession with fewer up-front costs and one in which they can begin work immediately.
The appraisal industry is taking steps to rectify these issues. The Appraisal Institute’s Education Relief Foundation has developed course and education scholarships that help defray the financial costs of becoming an appraiser. The industry is also assessing the use of simulated training modules designed to satisfy a portion of the experience requirement for the licensed residential and certified residential classifications. Further steps have been taken by both the Appraisal Foundation and the Appraisal Institute in partnership with the National Urban League to promote greater workforce diversity.
A comprehensive toolkit is needed to address home valuation issues in the short term
Diversity in the appraiser profession will not occur immediately, so additional tools with more immediate impact are needed. AVMs represent one solution to the undervaluation of homes in Black and Hispanic neighborhoods. These models apply mathematical algorithms to a database of housing activity, including sales transactions, to calculate a home’s value.
The Federal Housing Finance Agency (FHFA) expanded the use of automated valuation techniques amid the pandemic for government-sponsored enterprise mortgages, including for purchase loans. But despite allowing for greater flexibility in home valuation options, the majority of GSE transactions will not use an automated valuation, and instead require an appraisal by a qualified residential appraiser. Black and Hispanic homebuyers typically have higher loan-to-value ratios suggesting that they are even less likely to obtain a GSE mortgage that could qualify for an AVM estimate.
Before the FHFA expands AVMs, they may need to be enhanced. Although AVMs likely do not systematically undervalue homes in majority-Black neighborhoods, they may produce large errors, either too high or too low, relative to the underlying home’s value. A low estimate would threaten a purchase transaction, but a high estimate could set the homebuyer and the broader community up for home price declines in the future.
Policymakers can also take steps to counter appraisal bias in the short term. Research suggests that appraisers continue to use the neighborhood’s racial or ethnic composition to identify comparable homes. When combined with the racial inequities contained in historical home values, this practice can reaffirm disparities in home valuation across Black and Hispanic communities. Regulatory legislation that requires appraisers to consider similar homes in neighborhoods with different racial or ethnic compositions could improve valuation accuracy in neighborhoods of color.
Taking steps to improve appraisals can narrow the racial homeownership gap
Today, fewer than half of Black and Hispanic households are homeowners. At the same time, homeowners of color typically accumulate less housing wealth relative to their white counterparts, directly contributing to the broader racial and ethnic wealth gap. Appraiser bias has likely played a role in these homeownership and housing wealth outcomes, and increasing diversity in the field can diminish this bias in the long term. Policymakers and lenders can also address undervaluation in the short term and eliminate a barrier to housing wealth and support more equitable homeownership outcomes.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.
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