Appraiser Bias - There's an App For That

[George Hatch]

I asked AI the question based on your premise and here's what I got....

Home prices in minority neighborhoods are indeed influenced by market forces prior to an appraiser's engagement, but appraisers are deemed biased because they often rely on historically discriminatory practices and undervalue homes in these areas, perpetuating systemic inequities. The appraisal process typically uses comparable sales (comps) from nearby properties to determine a home’s value, but because of past policies like redlining—where federal agencies in the 1930s classified Black and minority neighborhoods as high-risk for lending—the baseline values in these areas were artificially suppressed. These lower valuations have persisted over generations, meaning that even if current market conditions suggest higher values, appraisers continue to use outdated comps that reflect historical discrimination rather than true market potential.

Studies show that homes in majority-Black and majority-Latino neighborhoods are systematically undervalued compared to similar homes in majority-white neighborhoods, even after controlling for structural and neighborhood characteristics. For example, a 2021 Freddie Mac study found that homes in majority-Black census tracts are significantly more likely to appraise for less than the contract price compared to those in majority-white tracts. Similarly, research indicates that homes in Black neighborhoods are valued at 23% less on average, amounting to a $48,000 per-home undervaluation and $156 billion in cumulative losses across U.S. cities.

This pattern suggests that appraisers, whether consciously or unconsciously, incorporate racial bias into their assessments by relying on a valuation system rooted in racial segregation and disinvestment. As a result, even when buyers offer market-rate prices, appraisals often fall short, not due to the home’s intrinsic value, but because the appraisal system reproduces past discrimination. This creates a feedback loop: lower appraisals lead to lower future comps, which in turn justify further undervaluation, reinforcing racial wealth gaps over time.

What I hate about these paragraphs is that we use the same process for virtually all property types and locations. Not just for properties in the low income areas. And we make our comparisons in our rental surveys and land valuations. IIRC the cat lady and Brookings thought adding the Cost and Income Approaches would change things, apparently in ignorance of how either of those other approaches are actually performed.


In an Income Approach we're not looking for what homes or apts are rented for across the region, we're looking for what those units are renting for in that neighborhood. Just like a potential tenant would. We're not developing our opinions on GRMs using sales from across the region, we're extracting them from the proximate sales. Same with the land valuations - and the accrued depreciation analyses - in the CA. We're looking locally, not regionally and then dividing for the average.

Never send a sociologist to do an appraisal because they don't know WTF they're talking about.

 

[ZZGAMAZZ]

What I hate about these paragraphs is that we use the same process for virtually all property types and locations. And we make our comparisons in our rental surveys and land valuations. IIRC the cat lady and Brookings thought adding the Cost and Income Approaches would change things, apparently in ignorance of how either of those other approaches are actually performed.


In an Income Approach we're not looking for what homes or apts are rented for across the region, we're looking for what those units are renting for in that neighborhood. Just like a potential tenant would. We're not developing our opinions on GRMs using sales from across the region, we're extracting them from the proximate sales. Same with the land valuations - and the accrued depreciation analyses - in the CA. We're looking locally, not regionally and then dividing for the average.

Never send a sociologist to do an appraisal because they don't know WTF they're talking about.

The concept that bias is inherent in the appraisal process bc the process if it works perfectly perpetuates the status quo is damn fascinating IMO. Yet it is based on a premise that ignores individuals' personal preference in lieu of an assumption that the primary objective is greed, i.e., that to maximize the per sf value of one's assets is the Only test of HBU. [Possibly a terrible analogy, but Tony Soprano described it well when his daughter came home from college with her BF who reflected multiple demographics...] Nuff said...

 

[shrubberyvaluation]

Just because an appraiser says it's worth more or worth less than someone else's opinion doesn't mean the market participants will return that price after adequate exposure. Its the buyers and sellers who establish the price in the market, not the appraiser.

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That is the point, they want to buy cheap, but have it appraise high for a refi. They are trying to guilt and pressure to have appraisals inflated.

 

[George Hatch]

The concept that bias is inherent in the appraisal process bc the process if it works perfectly perpetuates the status quo is damn fascinating IMO. Yet it is based on a premise that ignores individuals' personal preference in lieu of an assumption that the primary objective is greed, i.e., that to maximize the per sf value of one's assets is the Only test of HBU. [Possibly a terrible analogy, but Tony Soprano described it well when his daughter came home from college with her BF who reflected multiple demographics...] Nuff said...

I'm familiar with the allegation but am still waiting for anyone to prove appraisers are "stripping wealth" via different treatment.

You can't even touch upon the question of "WHY" until after you have come to a conclusion about "IF".

 

[ZZGAMAZZ]

I'm familiar with the allegation but am still waiting for anyone to prove appraisers are "stripping wealth" via different treatment.

You can't even touch upon the question of "WHY" until after you have come to a conclusion about "IF".

Finally things are starting to make sense: The Appraisers Forum poster who goes by the moniker of "George Hatch" is actually an AI Chatbot disguised as a human appraiser!!! How else could so much knowledge and wisdom be expressed so eloquently, so elegantly! [I certainly am appreciative; presume that all others agree!!!!!]

 

[George Hatch]

Has nothing to do with me. We've all been saying this from the outset. Nobody has proven the IF yet. The only thing most everyone can agree upon is what most normal people already understood all along - values for physically similar properties vary by location.

We won't even cross certain streets when appraising a new subdivision home out in the burbs unless we have no other choice. That's because we know what we're doing and these other critics don't.

 

[shrubberyvaluation]

Buyers want lower prices, sellers want higher prices. Some people try to use politics or peer pressure to get around this, at least partially.

If there was discrimination in the past by lenders, it is not my job to correct that. I report what is, not what I want it to be.

 

[ZZGAMAZZ]

I'm curious what their technical competency is with SFR appraising. Starting with the fundamental point that nobody can book a profit or a loss until they expose the property to the market and come to terms with a buyer who is either well informed or advised. That occurs prior to any involvement of a lender or the appraiser that lender uses to make their loan decision.

Just because an appraiser says it's worth more or worth less than someone else's opinion doesn't mean the market participants will return that price after adequate exposure. Its the buyers and sellers who establish the price in the market, not the appraiser.

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...with exception of the opinions of the sellers and buyers of the property that is the subject of a lending assignment--which Nephew Glenn defined a couple of years ago as less critical than one would think because buyers get what they want--but with much less skin in the game than it appears because they're leveraging other peoples' money more so than their own.

 

[TerryRohrer]

IIRC the cat lady and Brookings thought adding the Cost and Income Approaches would change things, apparently in ignorance of how either of those other approaches are actually performed.

I am sure I saw a clip or presentation by the cat lady where she very clearly suggested that the cost approach be completed with some adjustment from Cost New for Physical Depreciation. Unstated, but equally clear, was the notion that no impact from location or economic conditions should be recognized. Much the same as selecting sales from higher-priced neighborhoods to eliminate locational differences in the SCA. Those folks know enough about the appraisal process to carefully spin their yarn so that only appraisers can see the departure from unbiased, market-based processes.

 

[ZZGAMAZZ]

Buyers want lower prices, sellers want higher prices. Some people try to use politics or peer pressure to get around this, at least partially.

If there was discrimination in the past by lenders, it is not my job to correct that. I report what is, not what I want it to be.

Maybe your perspective describes the factor that automated alternative valuation programs can't provide--almost identical to the concept of reparations that was mentioned somewhere above . . . which addresses the need to cure past injustices, real or imagined... which outta be a disclaimer in the Scope of Work. [Damn interesting issue that goes to the fabric of society. Kinda like a long time pal of mine who is a liberal thinking scholar, who described the current alternative perspective as based on patterns throughout history when groups who define themselves as disenfranchised seek to be "franchised."