Appraisal Valuation Gap Uncovered in Minority Areas

Appraiser examining house

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A new analysis from Freddie Mac alleges appraisal values are more likely to fall below the contracted sales price in Black and Latino neighborhoods than in predominantly White areas. The research is based on an evaluation of 12 million appraisals for purchase transactions on single-family homes that were submitted to Freddie Mac from 2015 to 2020.

Nearly 13% of properties in Black census tracts received appraisal values lower than the contract price compared to 7.4% for those in White tracts, according to the study. In areas that are predominantly Latino, the appraisal gap for properties in Latino tracts rose from 7.7% to 9.4%.

Researchers note that differences in comparable sale distances, variances in comparable sale prices, and possible systematic overpayment for properties by minorities can explain “only a modest amount of the observed appraisal gaps for the minority tracts.”

“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,” 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.”

Bradley says Freddie Mac plans to focus on possible solutions, including appraisal best practices, uniform standards for automated valuation models, enhanced consumer disclosures, and revised fair lending exam procedures and risk assessments.