A Real Solution to fixing Black America’s Valuation Issue

Recently there have been headlines about how real estate appraisers are intentionally undervaluing properties in “Communities of Color” across America. Specifically, that real estate appraisers and automated valuation models (AVM’s) are biased when valuing properties in communities of color. The general claim is that these real estate professionals and automated tools are undervaluing properties by about 20% when compared to predominantly white communities. Recently Fannie Mae published “Appraising the appraiser” which analyzed 1.8 million appraisals completed for refinancing applications between 2019 and 2020. The report indicated Black borrowers refinancing their homes on average received lower appraisal values relative to automated valuation models, while white borrowers on average received slightly higher values. Furthermore, the Appraisal Sub Committee which is the governing body of the appraisal industry recently concluded that the appraiser plays a role in the discrimination of communities of color. With all these reports and professional opinions, is the appraiser really truly to blame?

The appraisal profession is designed to promote public trust and when a real estate appraiser is appraising a property, their main assignment, among many is to determine the fair market value of the property. The appraisers will research market trends, similar recent sales, listing, contracts, current building costs, land values, property income potential and then reconcile the various into what is defined as a “fair market value”.

So who’s to blame?  What’s the problem

I’d first like to point out that racial discrimination does happen and is real. These bad actors have no place in the real estate business. However, the type of discrimination described and defined within the reports is not a one off rouge appraiser. But rather, the thesis is that systematic racism, industrywide based on the intentional devaluation of African-American homes when compared to predominately white areas.

When determining the fair market value of a property, factors start off as macro as what country the property is located in and then get as specific as to what street and the various features and amenities. An appraiser is going to look for properties in the same state, county, city, subdivision and then more specifically what school district the property is located in. All in all, most buyers will sacrifice a lot of amenities and price point for high rated and safe schools for their children. The schools are controlled and run largely at the county and city level and administrators and community school boards directly influence the daily operations and overall performance of the schools.

In affluent areas, the schools are high quality, have updated amenities, are safer, better teachers, sports teams and provide stability for the entire community. In lower income areas, generally the schools are underfunded, understaffed, have lower testing scores and generally not as safe. This single factor contributes in its most significant way towards home value and wealth building and disparity amongst home values within communities. The appraiser profession, automated valuation modules and various valuation just simply accurately reflect a known issue amongst communities and within each community.

Simply put, if the schools were better, more families would move into the undervalued areas, they would be willing to pay more, because they have assurance of the quality of schools for their children and the values in those areas would go up.

Current school districting and budget restrictions create an unequal playing field both in revenue generation, administrative support and safety. Because of this, people are willing to pay significantly more for well-funded, properly supported and safe schools.

As a specific example, I live in the Washington D.C. Suburban area, boarding DC on the Maryland Side is Montgomery County and Prince Georges County, MD. These counties are very similar, in that the majority of the employment is centered around supporting the government and are well paying.

Table 1: February 2022 – Average Sale Price Grouped by Bedroom Count:

Table 2: February 2022 – Average Sale price by bedroom count – High School Specific

Table 1. reflects all home sales recorded within the respective counties and school districts within February 2022. Across all markets reviewed you can see gaps in average sale price between counties. This gap widens between counties with homes that have 3 or more bedrooms. Bedroom count is important as the more bedrooms, the better functional use for a household and family. The better the schools and larger the bedroom count, the higher the sale price generally.

Table 2. reflects all sales recorded within the two respective high school districts within Montgomery County and the top rated high school within Prince Georges County. You can see that even within the same county, the average sale price of a 4-bedroom property in the top-ranked high school district vs the lowest is over a million dollars. This gap is a direct result of the quality of the schools and the willingness of the families and parents to pay extra for quality education and environment.

Between Montgomery County, MD and Prince Georges, MD there is almost identical proximity to Washington D.C., Baltimore, employment options, financing options, educated employment base, buildable land, quality of amenities and high paying. All things considered, Montgomery County and Prince Georges are essentially the same areas and perform a similar function in that the demographic that resides in each county’s primary function is supporting the federal government, government contractors, biotech, and associated local industries. What is NOT the same, is simply the quality of the education and safety of the schools. The appraisal profession and associated output reports simply reflect the realities of the market conditions as reported above. If the appraisers are doing their jobs effectively would see large valuation gaps between market areas based on real market conditions. The appraisers are not biased, but rather accurately group properties based on the realities of the market, which directly correlate to the quality of the schools and overall market area.

Municipalities and states have the power to restructure how districting works and address the home valuation and wealth issue, point-blank (evident by representatives gerrymandering for political advantage).

The appraiser profession would benefit from additional training, more diversity and a closer watch on potential bias. However, efforts regarding eliminating appraisal bias should be refocused on the underlying data and issues regarding access to quality education, additional funding for areas that have lower scores and improving school safety. The interconnectedness between school districts and political powers may make it hard to implement decisive change (even if it’s the best solution).

If municipalities or states cannot (or will not) use redistricting as a viable tool, more federal support for minority schools should be a given. Expanding education programs and issuing new grant programs specifically targeting minority schools and households is a start.

Thank you,

Brian C. Coester