Appraisal Bias – A Counterpoint
- It is a fact that 85% of appraisers are white with the majority of them being middle-age white men, although that is rapidly changing. The bias argument presupposes they are inherently more biased than women, Hispanic, African American, Asian, Pacific-islander, etc. We simply don’t have enough data to verify whether this is true or not. Therefore, as the argument goes, white appraisers must be biased. Just as there are more black NFL players in professional football it follows that the majority of touchdowns will be scored and fumbles made by a black player. We can, and should, encourage more diversity in our ranks but that doesn’t automatically mean new recruits will be free from bias, nor does it mean white appraisers are disproportionately biased. If you need heart surgery, presumably you would seek out the best surgeon, regardless of his or her race.
- Interestingly, the National Community Reinvestment Coalition (NCRC) conducted a “mystery shopper experiment” in 2022, in Baltimore, with the item being a residential appraisal. It concluded that appraisers are racially biased. The experiment tested how appraisers would value the home based on race, on who answered the door. One key data point that the NRCR experiment does not disclose is that the two most glaring examples of racial bias were performed by the same appraiser. If this one appraiser were removed from the study, the data flips the other way. More glaring is that this one “outlier” appraiser who was so pivotal in skewing the data, is Black.
- There are about 70,000 licensed appraisers and about ten million appraisals were performed in 2021 in the U.S. The fact that “dozens” of cases of bias (per the New York Times) have been alleged, let alone proven, is remarkable. While a single case of bias is lamentable, the fact that less than 0.0004% (four ten-thousandth of a percent) of cases are alleged to have been biased is clearly indicative of how unbiased our profession truly is. Further, it is a testament of how critically important our work is against the backdrop of pressure from all sides, coupled with our meager compensation. A SIX SIGMA result should be celebrated and held up as a de facto standard for all professional practice groups.
- The typical residential real estate appraisal is about 30 pages long. Let’s assume there have been six dozen cases of alleged bias (“dozens”, per the New York Times). The stack of allegedly biased appraisals would stand about 9 inches tall. If all ten million appraisals were stacked on top of each other it would stand almost 19 miles high.
- It is a fact that redlining created artificially depressed “islands” of poverty, educational vacuums and listlessness which contributed to a lack of opportunity for property owners to trade up and capitalize on the American Dream. However, these practices ended decades ago. Community block-grants, opportunity zones, zero-down loan programs, and other government incentives have disproportionally aided these neighborhoods benefitting historically disadvantaged minorities as well as recent immigrants. Property appreciation in lower-income neighborhoods has actually outpaced mid and upper-tier neighborhoods in recent years. For more than 50 years, federal law has forbidden racial, religious, and other discrimination in home appraisals. Bottom line, the vestiges of redlining have zero bearing today.
- The bias narrative relies on straw-man arguments and faulty data such as the widely discredited and non-peer reviewed Brookings Institute Study by Dr. Perry. It is a fact that neighborhoods are different. It is our job to measure and analyze the actions of buyers and sellers. We do this by analyzing individual trades, not simply broad statistical or empirical data (ala Zillow). If one neighborhood sells for less than another, we measure it using paired sales, regression analysis or other techniques, document and adjust for it. If homes in the lower-priced neighborhood were consistently undervalued, there would be a line of investors waiting to swoop up every house in that neighborhood, flipping them for a profit. And if homes in higher-priced neighborhoods were consistently over-valued, we would see mass defaults and foreclosures.
- Appraisers are people. We are trained and required to analyze the actions of buyers and sellers in the marketplace. By juicing the appraisal process with socio-economic scoring, restorative valuation measures, etc. we would be injecting further biases into the market which would only lead to value distortions going forward. Who would buy a bundle of mortgage-backed securities containing a substantial number of biased property valuations? We must resist efforts to gerrymander the appraisal process.
- Posturing will not solve the problem. The current debate violates every tenet of the Socratic method of critical thinking. “What’s it worth?” should be the ONLY question licensed appraisers are charged with solving.
“. . . a delicate balance must be maintained between protecting borrowers on one hand and encouraging innovation in mortgage lending and sustaining the critical secondary mortgage market on the other. H.R. 3915 strikes this balance. Perhaps the most important steps the bill takes are to impose a Federal duty of care on mortgage originators and minimum standards on all mortgages. It is clear to me that we need to prevent the now widespread practice of getting people into loans they can’t afford.”