Valuation bias and digital redlining: no one-step solution

Today, non-white homeowners tend to own property that is lower in value than their white counterparts. Across the country, minority-majority neighborhoods are cheaper to buy, but that also means residents build less intergenerational wealth there over time, which is just one factor that compounds existing racial inequalities.

As new technologies play an increasingly important role in home appraisals and a large portion of today’s appraisers reach retirement age, industry stakeholders need to take steps to ensure that the lingering legacy of racism does not remain entrenched for another generation. .

What is digital redlining?

There are many ways to describe digital redlining, but understanding the history of physics Redlining is a crucial first step.

In short: In the early and mid-twentieth century, official government policy made it more difficult—often impossible—for nonwhites to buy a home or obtain a mortgage because the Federal The Housing Administration considered ownership in majority minority neighborhoods too risky for loan underwriting. The term “redlining” comes from the color-coded charts the FHA used to categorize lending risk into neighborhoods, but is now used colloquially to describe all kinds of systemic discrimination against non-whites.

Many real estate developments, especially in the decades following World War II, also prohibited non-whites who could afford a home from buying one.

” Its very important. The history of various policies, not just redlining but many government policies, has a great impact on the current housing situation,” said Kenon Chen, executive vice president of corporate strategy at Clear Capital, a real estate appraisal technology.

Today, digital redlining can mean not only how technology perpetuates low property values ​​in historically redlined neighborhoods, but also other ways in which all kinds of technology can be subtly or overtly discriminatory.

“Redlining, historically, has created a valuation disparity in majority-black neighborhoods,” says Mark Alston, public affairs president for the National Association of Real Estate Brokers (NAREB). “If you have a perfect appraisal in a majority black neighborhood today with perfect comps and no bias on the part of the appraiser,” chances are it will always be appraised at a lower value than a similar property in a predominantly white neighborhood because of this historical bias.

Can technology help?

Desktop appraisals, which allow appraisers to estimate the value of a home without visiting the property – a practice that has gained much more traction during the pandemic – and automated valuation models (AVMs) are increasingly more common. Earlier this spring, Fannie Mae made office appraisals a permanent option for appraisers appraising single-family primary residences.

These methods could potentially help remove some biases from the equation – and help fill the void as more evaluators retire – but technology alone is not the answer and has its limitations.

“In some of the underserved communities in this country, you have thriving areas,” says Alston. “How sensitive is the algorithm to this area? The lack of transparency is really a problem.

The accuracy of AVM also varies greatly depending on the number comps are available at the time of the assessment run.

According to CoreLogic. “Generally, the more property sales, data and property information available in an area, the more accurate the AVM estimate is likely to be.”

Beyond the amount of comps available, if these recent sales are within a historically bounded area, AVMs often contribute to the problem rather than limit it.

What else can we do?

Making assessments fairer for all will depend as much on the adoption of new technologies as diversifying the ranks of the reviewers themselves, says Alston. According to data from the Bureau of Labor Statistics, nearly 98% of active appraisers are white and only about 30% are women.

The Biden administration released a proposal this spring, the Plan to Advance Property Appraisal and Valuation Equity (PAVE), which suggests a number of assessment reforms, including:

  • Create an appeal process when an assessment falls below expectations
  • Strengthen data comps used for assessments
  • Addressing Bias in AVMs

Additionally, in the fall, the US Department of Justice announced an anti-redlining initiative, which includes increased oversight of lending institutions that discriminate against minority borrowers.

These big steps are easier said than done, however, says Alston.

“I don’t know what ointments are other than diversifying the assessment field,” says Alston. “I think you have to do it first and then we have to talk about repair. If I cement this lower valuation, I cement the disparity and the redlining has its intended effect forever.

There’s no easy fix that can level the playing field in real estate overnight, but experts say work can be done to start addressing some of the disparities that exist.

“This is actually an incredible opportunity. The ‘Never let a good crisis go to waste’ quote: we are finally looking face-to-face with some of these long-standing issues,” Chen says. “As we look at both the challenge reduce bias and increase diversity in the profession, both of these problems can be solved with the same solutions.”

At the end of the line

Lower property values ​​make it harder for nonwhite and especially black homeowners to build family wealth, so finding ways to address the disparity is crucial to help nonwhites achieve greater economic stability. If industry stakeholders do not take active steps to make assessments fairer, existing biases will never be corrected and may be further perpetuated by new technologies. As the assessment process adopts greater automation, it is essential to ensure that these new practices are implemented fairly.

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