Tag Archives: appraisals

Housing appraisals reflect existing racial inequalities in housing

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A new published sociology study connects housing appraisals and race:

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For decades, research has shown that houses in predominantly Black neighborhoods have been generally appraised at lower values than houses in majority-white neighborhoods. This is true even when comparing housing stocks that have the same characteristics (age, square footage, number of rooms, etc.) and neighborhoods of equal socioeconomic status.

The new study finds that the racial composition of a neighborhood was an even “stronger determinant” of a home’s appraised value in 2015 than it was in 1980, to Black homeowners’ increasing disadvantage. Analyzing reported home values, Howell and Korver-Glenn found that the race appraisal gap has doubled since 1980: The difference in average home appraisals between neighborhoods that are majority-white and those that are predominantly Black and Latina was $164,000 in 2015, up from about $86,000 in 1980.

Rather than explaining the racial inequity as a vestige of historic segregation, the study finds more culpability in a method used to calculate appraisals today, the “sales comparison approach,” which determines a home’s appraised value by looking at the prices of other similar homes that were recently sold from the same neighborhood. The real estate industry sees this as a race-neutral way of appraising homes so that it doesn’t run afoul of fair housing laws, and it is one of the key criteria used for determining property values. But what makes this method problematic, according to the study, is that it basically grandfathers in racist home pricing that existed before fair housing legislation.

In other words, if an appraiser is calculating  the value of a home in a Black neighborhood by comparing it to houses recently sold around it, then chances are she is comparing it to other Black-owned houses that, because of the legacy of segregation, have handicapped values in the market compared to similar homes in white communities appraised at higher prices. The unfairly valued prices of homes in Black neighborhoods before the 1970s thus serves as the baseline for how homes are appraised and priced today. While the Fair Housing Act and Community Reinvestment Act forbade practices like redlining and denying mortgage loans based on race, they did nothing to readjust housing prices in segregated neighborhoods after they were passed.

In other words, past decisions and actions valued homes in white neighborhoods more than homes in black neighborhoods because of racism. Today, appraisals that typically compare homes in like neighborhoods perpetuate those different homes values. The system carries on these inequities even if no appraiser is intentionally racist; the way things are done continues the patterns set decades before.

There is another question here as well: what exactly are appraisals and housing values based on if they contingent on factors like race and not just on the characteristics of the home? Is there inherent value in a particular configuration of home traits – say a three bedroom, two bedroom home with a two car garage – or is the value completely dependent on what society says it is? I know the market is involved and the head of an international appraisal association is quoted later in the article cited above talking about supply and demand. But, if supply and demand says some homes are worth more because of the people who own them and the people in the neighborhood, this does not exactly sound like a desirable “free market.”

Subjective decisions can affect home appraisals

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The final appraisal price for a home can be influenced by numerous subjective factors:

A massive, first-of-its-kind study of 1.3 million individual appraisal reports from 2012 through this year conducted by real estate analytics firm CoreLogic offers a suggestion: You should look at what are called adjustments to appraisals that involve relatively subjective estimations — the appraiser’s opinions on the overall quality level of your house, its condition, location and view — rather than more objectively determinable items such as living space square footage, lot size, number of baths and bedrooms, etc…

Adjustments are made in 99.8 percent of all appraisals, according to the CoreLogic study. The most frequent adjustments involve objective features of houses: Living area, rooms, car storage, porch and deck were all adjusted in more than 50 percent of the study’s 1.3 million appraisals, according to CoreLogic. (As a rule, the adjustments on objective features were not large in dollar terms. For example, room adjustments were made in nearly three-quarters of all appraisals but averaged only $2,246 and did not affect the final appraised value dramatically.)

Adjustments involving more-subjective matters — the overall quality or condition of the house — were less common, but they typically triggered much bigger dollar changes. The average adjustment based on quality was nearly $15,000, which is more than enough to complicate a home sale. Some subjective adjustments on the view or location of high-cost homes ran into the hundreds of thousands or even millions of dollars…

Research released last week by Platinum Data Solutions, which reviewed 300,000 appraisals made between July and September, found that fully 39 percent of “quality” or “condition” ratings conflicted with previous ratings on the same property. That inevitably invites controversy.

In other words, appraisals are an inexact science. What makes it particularly frustrating is that the stakes can be big as sellers and buyers are dealing with one of the biggest financial investments of their lives.

Two more thoughts about these findings:

  1. In order to cut down on the variation in findings, would it be better to regularly have multiple appraisers for the same property or some sort of blinded review?
  2. Here is how an example of big data can help reveal patterns across numerous properties and appraisers. But it would be particularly interesting – and perhaps some money could be made – if research identified individual appraisers who consistently had high or low findings.

Appraisals based on neighborhood sales contribute to price differentials in Chicago

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Home appraisals are often based on nearby properties, leading to large price differences and lending practices across Chicago neighborhoods:

That means if you’ve got an area with lots of boarded up houses and lots of extremely low value sales, then it’s likely that even a newly rehabbed house would be appraised at a lower price. Hobbs says that’s because most residential appraisals are determined by comparing that property with ones that have recently sold in the neighborhood.

“In the desirable neighborhoods, there’s an insufficient amount of inventory or supply and therefore buyers are competing even more ferociously to be in place, to be the one individual or family that is successful in buying that property,” he said.

So in an area like Lincoln Park, that demand drives prices way up, even beyond peak prices. And appraisers and banks feel comfortable with that because they have the numbers to back it up. But when someone wants to make a traditional purchase in a marginal area like Lawndale, appraisers and lenders are more conservative, especially after what happened during the housing crisis…

Rose said in the post-bubble market, banks are putting more weight on the value of a property than they did before. He thinks using cash transactions and distressed sales as comparables doesn’t really give a true market sense for what a house should sell for.

Another point in favor of living in hot or desirable neighborhoods: lenders are more likely to make loans. In contrast, economically depressed neighborhoods have a tougher time recovering unless lending institutions decide to make an investment or people have cash or capital to get past the lower appraisals. This could have the effect of reinforcing residential segregation for long periods of time.

As they say in real estate, it’s all about location, location, location…

Hard to get green homes appraised as there is a lack of knowledge, comparables

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Interest in green homes, exemplified by net zero energy homes, may be growing but there is an issue: because there is a lack of comparable homes, appraisals for green homes are more difficult to do:

Last year, single-family green home construction represented 17 percent of the homebuilding market, in effect doubling since 2008, according to a report by McGraw-Hill Construction. Researchers predict that by 2016, green home construction could comprise 29 percent to 38 percent of the market, as builders devote more time to green projects. The share of remodeling projects labeled as green is expected to rise as well…

Appraisers are slowly getting up to speed. Since 2008, almost 4,900 appraisers nationally have participated in 275 courses on green and energy-efficient valuation conducted by the Appraisal Institute trade group. Still, green home appraisals continue to be difficult, in part because there are few comparable sales but also because the building technology is changing. That makes it hard for appraisers to value — and for lenders to accept those higher values — home features that can run the gamut from rain barrels to a tankless water heater to a whole-house geothermal heating system…

In the Chicago area, Midwest Real Estate Data LLC added “green” fields to its multiple listing service so sellers can highlight environmentally friendly features of their homes to potential buyers. The Appraisal Institute created an addendum to appraiser forms to help analyze the value of green features. And lenders are starting to track so-called green mortgages to see if defaults are lower than on traditional home…

To increase the chances that improvements that go above and beyond what’s required by local building codes is correctly valued, experts recommend documenting green features added to a home.

They also urge builders and consumers to consider obtaining third-party certification about the home’s energy efficiency.

Put another way, there is more cultural and economic interest in green homes. People want to both reduce their energy costs but also want homes that are “responsible” and not seen as energy-hogging McMansions. However, it takes some time for the whole market to catch up to the perceived higher values of these new homes. This is the real issue here: while extra money and time may be spent on green features, appraisers aren’t yet “rewarding” builders and homeowners with the increase in housing value they think a more efficient and green-conscious home deserves.

Thinking more broadly about this, I wonder about the motivations of builders who are constructing more green homes. Are they motivated more by wanting to be green or by the knowledge there is a growing market for such homes? Of course, being green and making money can go together and perhaps this is how it should work in a perfect world. But, this might matter for some who are more concerned about being green and who wonder if being green is currently about being trendy which could endanger such causes down the road when the cultural and economic winds change.

Boost home values by leaving out distressed sales

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The Chicago Tribune looks at one way home values might stabilize: simply don’t include distressed home sales in the calculations and in appraisals.

A report from data provider CoreLogic showed that Chicago-area single-family home prices were relatively flat in February, down only 0.37 percent from a year ago. But that figure includes only traditional sales and not the impact of distressed-sales prices. Add in the sales of foreclosed, bank-owned homes and short sales, and Chicago-area home prices fell 10.4 percent in February on a year-over-year basis…

There’s one problem with Ford’s proposal, though. Appraisers are licensed by the state of Illinois but follow uniform federal guidelines that dictate that they analyze available comparable sales.

“It would lead to a misleading report,” said Chip Wagner of A.L. Wagner Appraisal Group Inc. in Naperville. “You can’t overlook any of the factors in the marketplace that are influencing factors. It sounds like a good idea in fairness to homeowners, but the appraisers that follow that would be in (danger) of losing their licenses.”

While this is being considered in a number of locations, it does seem that legislators would need to decide whether the benefits for homeowners outweigh the limitations.

Additionally, this sort of story might be good ammunition for those who are cynical about statistics: can’t you just change around a definition and say something very different (in this case, Chicago home sales have declined versus they have barely declined)? But at the same time, most statistics are dependent on their operationalization: whether home sale values should include the sales of distressed homes is more of a definitional issue and decisions about this would likely come down to vested interests and motivations.