In 2001, Steve Johnson bought his home in North Center, Chicago, for $320,000. Over 13 years, Johnson and his wife invested over $100,000 in upgrades, including an ensuite primary bedroom, wood floors, custom kitchen cabinetry, black granite countertops and high-end kitchen appliances.
“Our (house) was a gem on a block of gems,” he says.
In 2014, when the couple decided to sell their house, comparable homes in the area were selling for approximately a million dollars. Johnson, a mixed-race corporate communications executive and his wife, who is Latina, were present when the home was appraised. They were shocked when the report valued their home in the $640,000 to $650,000 range.
“Some of our friends are realtors and told us the range we could expect — it was on the upper end of a million,” he says. “We were flabbergasted.”
During the appraisal, Johnson noticed something was off with the appraiser’s demeanor and described him as “noncommittal.” The appraiser, who was white, didn’t ask any questions and gave one-word responses. He spent only 20 minutes in their home, which was three times the size of the townhouse they previously owned. The report also contained errors, including listing two bathrooms instead of three and characterizing their high-end kitchen as “middling.”
“We’d love to believe that it was an incompetent appraiser, but knowing the stories and the context of it, I believe it was a discriminatory experience,” says Johnson.
Homeownership and Wealth
A home is the most valuable asset many people will own. When appraisal discrimination occurs, it is harder for communities of color to build generational wealth with their homes.
“Real estate is something you can pass on,” says E E Okpa, Economic Development & Real Estate Strategist and founder of the OKPA Company, a commercial real estate consulting firm.
“Nobody transfers their degree to their child, but you can transfer your assets to your child. The biggest factor that affects wealth creation in America is real estate.”
In an analysis of more than 12 million appraisals, Freddie Mac found Black and Latino homeowners were more likely to receive lower values than the contract price compared to white homeowners, even considering structural and neighborhood characteristics.
“When the value is not properly addressed, it’s hard to create wealth,” says Okpa. “If the bank says your value is 50% or 70% less than what it is, what is that going to mean? It’s either going to make your interest rates go higher, or they want a larger down payment. Those two factors are very critical.”
Appraisal discrimination exacerbates other homeownership challenges facing communities of color.
In 2020, Black and Hispanic mortgage applicants were rejected for mortgage loans at a greater rate than white or Asian applicants and were twice as likely to tap into their 401(k) or pensions for a home down payment than White Americans.
A higher share of Black and Hispanic households are affected by home foreclosures. Hispanic and Black families are also more likely than other borrowers to use alternative financing to purchase a home, which typically comes with higher interest rates.
“It’s very idealistic and romanticized the way we look at homeownership,” says Daniel Smith, founder of Keepingly, a platform that allows homeowners to keep all records related to their home in one central place. “The euphoria of the American dream is to be able to have a home and to claim home ownership. The problem we don’t talk about sometimes is the sustainability of home ownership.”
Are Home Appraisals Subjective?
Almost a decade before the news was filled with stories of people of color “whitewashing” their homes to combat low appraisals, Johnson and his wife did the same with their home in 2014. He calls it “debrowning” their house.
For the second appraisal, the couple took down all family photos and wasn’t present for the evaluation. The home was valued in the upper $800,000 range and sold for $930,000, above the asking price.
Was their first appraisal the result of discrimination? Or is there a chance the previous appraiser was just incompetent?
“I would love to say it was an incompetent appraiser, but when we add everything up – we still hold to this day that this guy saw that it was a brown house,” says Johnson.
Appraisal discrimination is nothing new. In Okpa’s 30+ year career in the real estate industry, he has seen his fair share of the biased practice.
His career goes back to the 1980s when he worked for the Federal Deposit Insurance Corporation. In 1992, Okpa was certified to be an appraiser. He recalls the white people who didn’t want him to appraise their properties and then challenged appraisals because he was Black. Some white appraisers were afraid to go into Black neighborhoods and if they did, they didn’t take the time to assess the properties properly. Okpa notes how he would see the phrase “no pride in ownership” in their reports.
“They would use certain phrases and words that immediately put the entire asset in the downward adjustment,” he says.
Several factors go into appraising a property. The appraiser creates an unbiased report by inspecting the property and examining criteria like recent sales of similar homes, market trends and the details and condition of the home.
“Each of these sections leads you to what is going to be the ultimate conclusion of value and that’s where they start to do the adjustment,” Okpa says. “Don’t forget, it is an opinion, but that opinion has to be done in a systematic, professional manner. Sometimes they put more weight on the subjective aspect than the objective aspect.”
The Compounded Effects of Appraisal Discrimination
Owning a home has long been an effective way to build wealth. The Brookings Institution estimates that due to biased appraisals, homes in Black neighborhoods are devalued by $48,000 for each home, leading to $156 billion in cumulative losses.
While those losses are staggering, Michael Neal, a principal research associate with the Urban Institute, says appraisal discrimination does more than impact the individual wealth of people of color.
“That’s one individual transaction, but that home may be used as a comparable sale in the transaction of another home,” he says. “That’s how issues surrounding appraisal bias can spread to the neighborhood. At the same time, the degree to which lower appraisals reflect historical discrimination or structural racism, then the comparable sales mechanism is one way you’re effectively spreading bias over time.”
In addition, appraisal discrimination is a contributor to the racial wealth gap.
The typical white family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family, according to the Federal Reserve. A study highlighted by the White House found that eliminating biased appraisals would narrow the wealth gap by an additional 16% between Black and white households and 4% between Latino and white households.
“We’re not trying to say that everybody’s going to be racist or make judgments on communities based on having a racist opinion or racial lens,” says Smith. “The fact is that your bias bleeds in. We all come to a situation with inherent biases.”
Solutions to Home Appraisal Discrimination
When my husband and I refinanced our mortgage about ten years ago, a Black appraiser evaluated our home. Little did we know he was one of very few. While 85% of home appraisers are white, only 6% are Hispanic and almost 4% are Black. Could increasing diversity in the appraisal industry improve housing outcomes for people of color?
“The profession is facing structural challenges in terms of age and research suggests there are shortages of appraisers in different parts of the country,” says Neal. “There’s certainly a role for diversifying the industry, partly because Black people may have a stronger understanding of the neighborhood.”
Desktop appraisals and automated valuation models (AVMs) have been highlighted as ways to reduce appraisal discrimination. Desktop appraisals are conducted remotely using tax records and information from the Multiple Listing Service (MLS) without the appraiser ever visiting the home. AVMs are computer programs that take comparable sales and other home characteristics to estimate their market value. The use of technology can limit the human element in appraisals, but Neal notes that even AVMs have their issues.
“Whether they are undervalued or overvalued, AVMs are more likely to be wrong in Black communities, relative to white communities in at least in the three cities – Atlanta, Washington, DC and Memphis, Tennessee,” he says.
Smith, a victim of appraisal discrimination, says homeowners can empower themselves by keeping records of all the upgrades and work they have done to their homes.
“By providing more accurate and verifiable data — whether it’s receipts or images of what you’ve done — there’s no room for interpretation with plain data and facts,” he says.
Okpa says there needs to be a nationwide conversation about appraisal discrimination and organizations like the NAACP need to get involved. Earlier this year, the Biden-Harris administration released an action plan to address bias in home appraisals. PAVE (Plan to Advance Property Appraisal and Valuation Equity) includes commitments to prevent discrimination in AVMs, make the appraisal industry more accountable and empower consumers with more information and assistance.
Defying the Legacy of Housing Discrimination
The significance of homeownership for people of color and fairness in appraisals is not lost on Johnson.
With the equity in his previous home, Johnson purchased ‘a bigger and better house’ in Evanston, Illinois — a suburb of Chicago with a legacy of redlining and the first U.S. city to pay reparations to Black residents. Evanston is also the city where he grew up and his interracial parents persevered through prejudice and discrimination to become homeowners.
Johnson is pleased with the ability to pass on his housing wealth to his three children. For homeowners who are about to get their properties appraised or have received a low appraisal, he has this advice.
“I would love to say don’t ‘debrown’ your house, but at the same time, I would say neutralize your house,” Johnson says. “For a white family, I would tell them the same thing.”
“It’s almost like health care,” he adds. “One opinion isn’t enough. Make sure you plan for two appraisals because it might not even be discrimination, they just might suck, but you’re gonna be in a better place.”