- MORTGAGE
- BUYING A HOME
What Is Property Appraisal and Valuation Equity (PAVE)?
Property Appraisal and Valuation Equity (PAVE) is a set of guidelines for producing home appraisals that are free of racial, ethnic, or any other form of bias.
Historically, home appraisals have been skewed by biases that disproportionately harm homeowners in communities of color. This is one factor in the racial and ethnic wealth gap in the U.S. It has also contributed to the disparities in the rates of homeownership between people of different races and ethnicities and in the financial rewards associated with owning a home.
KEY TAKEAWAYS
- Property Appraisal and Valuation Equity (PAVE) recommendations reflect a policy goal of removing bias from the property appraisal process.
- Researchers have observed a market value gap between the valuations of majority-Black and majority-White neighborhoods over decades.
- Unfairly undervalued appraisals have an outsized financial impact since the single biggest asset of many families is their home.
- Systematic undervaluation of properties in a neighborhood has a significant effect on the accumulated wealth of homeowners in that community.
- In 2021, President Joe Biden created the PAVE Task Force to reduce bias and discrimination in home appraisals.
Understanding Property Appraisal and Valuation Equity (PAVE)
The median White family holds eight times the wealth of the typical Black family and five times the wealth of the typical Latino family, according to the most recent data from the Federal Reserve.
Some of that disparity is due to bias in the home appraisals that are necessary every time a home is bought, refinanced, or sold. The precise amount is impossible to pinpoint.
PAVE has been a concept and a goal for many years. However, it was only in 2021 that President Joe Biden announced the creation of a task force to evaluate the causes, extent, and consequences of appraisal bias and to produce a set of recommendations to remove it.
Why PAVE Matters
Whether you’re buying a home using a mortgage, refinancing an existing mortgage, or selling your home, a home appraisal is a key component of the transaction.
There are different methods for assessing value. Most appraisers use the Uniform Residential Appraisal Report from Fannie Mae for single-family homes. The report asks the appraiser to describe the interior and exterior of the property, the neighborhood, and nearby comparable sales numbers. The appraiser then provides an analysis and conclusions about the property's value.
The home appraisal process inevitably involves subjective judgments, and these can allow bias to affect the valuation of a property.
Researchers have observed a market value gap between majority-Black and majority-White neighborhoods for decades. On average, homes in majority-Black neighborhoods are valued at less than half of those in majority-White neighborhoods.
Objective measures of a property’s features—such as the age of the property or its proximity to public transportation—do not explain the entire disparity.
One of the reasons for this is suggested by more recent studies of the appraisal commentaries that are part of the report. This is a free-form narrative section in which the appraiser is able to detail the reasoning behind the valuation. Government research has revealed that appraisers sometimes make racial and ethnic references and cite them as a basis for reducing the appraised value of a home.
There are also anecdotal reports, too. According to a recent California lawsuit, when a Black family’s Bay Area home appraisal came in surprisingly lower than expected, they asked a White friend to pose as the homeowner. The appraisal came in at about $500,000 higher.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One step is to file a report to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD). Note that the home appraisal process is also subject to bias; push back if you think your home's price has been unfairly devalued.
The Impact of Property Appraisal and Valuation Equity
The home appraisal determines the maximum amount of money that a bank is willing to loan to the applicant for a mortgage on that property.
One of the many problems that can occur in cases of valuation bias is an inequitable appraisal. That is, the appraisal comes in at a price below the contract price agreed upon by the buyer and the seller.
When the appraisal comes in lower than the contract price, the buyer usually seeks to renegotiate the price or walks away from the deal. A determined buyer might go ahead with the original deal but could be required to pay a larger down payment.
Other Side Effects of Low Appraisals
Homeownership in the U.S. is a large part of wealth creation. Close to one-quarter of the wealth of a typical American household is in home equity.
Families whose homes have been appraised too low have less wealth on paper. That can exclude them from a number of financial services associated with the equity they hold in their homes. For example, a couple upgrading a kitchen might be forced to finance the project using a high-interest-rate credit card rather than a much cheaper line of credit based on their home equity.
The Wider Impact
Inequitable appraisals have knock-on effects across entire communities. Appraisers look at purchase prices in a neighborhood as part of their valuations—and these purchase prices might also be informed by racial or ethnic bias.
Each instance of a lower purchase price becomes a candidate for the next appraiser to choose as a comparable sale for the next appraisal in the community, carrying the impact of the lower value forward.
Over time, even a slight imbalance can have a significant effect on the property values in a community and hence on the accumulated wealth of homeowners in that community.
Bias and discrimination in property appraisal have been structural impediments to homeownership in the U.S. More than 50 years after the Fair Housing Act’s passage, the racial homeownership gap is wider than ever: In 2021, the Black homeownership rate reached only 44%, while the White homeownership rate reached 74%.
Research also suggests that bias is becoming more pronounced. The racial composition of a neighborhood shaped home values more in 2015 than in 1980, which researchers identified as a key factor driving the growing racial wealth gap, according to U.S. Census Bureau data. Over that 35-year time span, homes in White neighborhoods had appreciated in value by about $200,000 more than similar homes in communities of color, the researchers found.
The PAVE Task Force
On June 1, 2021, the centennial of the Tulsa Race Massacre, President Biden announced the creation of an interagency initiative called the PAVE Task Force. The Task Force has been instructed to:
- Evaluate the causes, extent, and consequences of appraisal bias
- Establish a transformative set of recommendations to root out racial and ethnic bias in home valuations
PAVE represents the most serious attempt in decades to reduce home appraisal discrimination. The task force includes 13 federal agencies and offices and is chaired by Director of the Domestic Policy Council Ambassador Susan E. Rice and U.S. Housing and Urban Development Secretary Marcia L. Fudge.
So far, PAVE has launched an independent review of the Uniform Standards of Professional Appraisal Practice (USPAP) to understand potential barriers to entry for underrepresented communities.
Also, the Federal Housing Administration (FHA) issued a Mortgagee Letter to clarify nondiscrimination requirements applicable to appraisers and lenders.
Has Racial Discrimination Affected Home Appraisals?
Yes. Numerous studies have shown that homes in White neighborhoods receive higher valuations than those in comparable minority communities and that the problem is growing, not shrinking.
What Solutions to Home Appraisal Inequities Have Been Proposed?
Proposed solutions include training in how to avoid unconscious racial bias, updating professional ethics and guidelines, and creating a scholarship fund to increase diversity among home appraisers.
What Can I Do If I’m a Victim of Home Appraisal Bias?
If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. File a report to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).
The Bottom Line
Researchers have observed a market value gap between majority-Black and majority-White neighborhoods for decades. Appraisal bias is one of the gap's causes.
Appraisals that unfairly undervalue a property can have significant effects. The single biggest asset for many families is their home. And, systematic undervaluation of properties in a neighborhood can affect the entire community's property values and reduce the accumulated wealth of all of the homeowners who live there.
The aim of Property Appraisal and Valuation Equity (PAVE) is to create a home appraisal process that is free of bias.