Freddie Mac released an analysis showing that appraisal values are more likely to fall below the contracted sale price of a home in census tracts with a higher share of Black and Latino households. The extent of that appraisal gap increases as the percentage of Black and Latino individuals in the census tract increases, according to Freddie Mac.

The research is based on 12 million appraisals for purchase transactions submitted to Freddie Mac between 2015 and 2020 through the Uniform Collateral Data Portal.

“An appraisal falling below the contracted sale price may allow a buyer to renegotiate with a seller, but it could also mean families might miss out on the full wealth-building benefits of homeownership or may be unable to get the financing needed to achieve the American Dream in the first place. This is a persistent problem that disproportionately impacts hundreds of thousands of Black and Latino applicants,” Michael Bradley, senior vice president of modeling, econometrics, data science and analytics in Freddie Mac's Single-Family division, said in a press release. “Our research marks the beginning of a comprehensive effort to better understand the key drivers contributing to the appraisal gap. Our goal is to develop solutions to this persistent problem, including appraisal best practices, uniform standards for automated valuation models, enhanced consumer disclosures, improved value processes, and revised fair lending exam procedures and risk assessments.”

Research highlights included:

• The appraisal gaps identified are not being driven by only a small fraction of appraisers -- a large portion of appraisers who completed appraisals in both minority and non-minority areas generated statistically significant gaps.
• Properties in Black and Latino tracts receive appraisal values lower than the contract price more often than those in white tracts -- 12.5 percent of the properties in Black tracts receive appraisal values lower than the contract price compared to 7.4 percent for those in white tracts, leading to a gap of 5.2 percent.
• As the concentration of Black or Latino individuals in a census tract increases, the appraisal gap increases. For example, as the population of Latino individuals increase, the appraisal gap for properties in Latino tracts increases from 7.7 percent to 9.4 percent.
• Differences in comparable sale distances, comparable reconciliation, variances in comparable sale prices and possible systematic overpayment for properties by minorities can explain only a modest amount of the observed appraisal gaps for the minority tracts.

Analysis was conducted on appraisals for the purchase of a single family one-unit home. Numerous robustness checks from different perspectives were conducted as part of the analysis, including by appraisal type, occupancy type, property condition, housing trend indicated in the appraisal report and by urbanization level. In addition, analysis was conducted on the top 30 metropolitan statistical areas. The patterns observed based on the aggregate national data mostly persist; thus, the appraisal gaps seem pervasive, according to the release.

“Equity in housing is a critical issue and one Freddie Mac takes very seriously,” Pamela Perry, single-family vice president of equitable housing at Freddie Mac, said. “We’re uniquely positioned to investigate potential gaps and provide data-driven research like this to advance solutions that promote equity across the valuation process. In addition, we are committed to engaging with the Appraisal Institute to review the analysis in depth so that we can work together in identifying causes and solutions.”

Freddie Mac said it will continue to explore opportunities to leverage various data collection methods, examine data driven analytics and develop supporting tools to create new approaches across the valuation spectrum. The company is also testing whether alternatives to traditional appraisals offer a more objective analysis of property value.

“We are grateful to Freddie Mac for investigating this longstanding and important issue by leveraging appraisal data from the Uniform Collateral Data Portal, and for their work toward solutions to promote equity in homeownership for everyone,” Appraisal Institute President Rodman Schley said in an emailed statement. “We value Freddie Mac as a core partner in our Appraiser Diversity Initiative, which commits to recruiting more appraisers of color and women. Unconscious bias is real and exists in all industries. Appraisal is one piece of a larger ecosystem, and appraisal groups are working alongside consumer groups, real estate brokers and agents, banks, government agencies, think tanks and others to explore where housing inequities may stem from and what combination of solutions should be considered. What is important is understanding, knowledge and guidance on how to recognize and interpret it when it occurs.

“Over the last two years, the Appraisal Institute has been amplifying and accelerating DE&I initiatives and partnerships to bring about positive change. Diversity, equity and inclusion in appraisal is a top priority for the Appraisal Institute, and we take that responsibility seriously,” Schley added. “That’s why we are backing broader solutions that advance equity, looking at our processes and approach, recruiting more appraisers of color and women, ensuring consumers know their rights, and reinforcing ethics, education and training. There is more to do, and this work is a priority for the Appraisal Institute. We look forward to our continued work with Freddie Mac to create solutions in the appraisal system.”

The company is a core partner in the Appraisal Institute’s Appraiser Diversity Initiative, which commits to building a more diverse next generation of appraisers and is a member of Project REACh’s appraisal working group. The Comptroller of the Currency’s Project REACh initiative is dedicated to financial inclusion through enhanced access to capital.