Appraisal fairness improving, reversing a decade-long trend
A new analysis of federal data found that the racial home appraisal gap has narrowed since the formation of the PAVE task force.
- FHFA data showed that the percentage of low appraisals in minority and high-minority neighborhoods has fallen over the past two years.
- The percentage of low appraisals is still significantly higher in minority neighborhoods compared to majority-white areas.
- Most states have seen a substantial narrowing of the appraisal gap, though in six states it has widened.
The racial gap in home appraisal values is beginning to narrow, reversing a decade-long trend of growing inequity.
A new analysis of appraisal data from the Federal Housing Finance Agency found that the percentage of low appraisals in minority and high-minority neighborhoods dropped in the past two years, while the percentage of low appraisals increased slightly in white neighborhoods. An appraisal is considered low if it comes in below the contract price.
The FHFA determines neighborhood racial characteristics based on census tracts: White neighborhoods have a minority population less than or equal to 50%; minority neighborhoods are more than 50%, and high-minority neighborhoods are more than 80%.
Based on the latest FHFA appraisal data, the appraisal gap between white and minority census tracts dropped 2.9 percentage points over the past two years. The gap narrowed further between white and high-minority tracts, dropping 4.8 percentage points.
Still, a significant gap remains: The percentage of low appraisals in white neighborhood tracts was 9.3% in the past year, compared to 12.2% in minority neighborhoods and 14.1% in high-minority neighborhoods.
The report broke the timeline into two phases: Appraisals done prior to June 2021 — before the formation of the Property Appraisal and Valuation Equity (PAVE) task force — and surveys done after the release of a PAVE action plan in March 2022 through the first quarter of 2023.
While longer-term assessments are needed, said FHFA Research Officer Anju Vajja, who authored the report, the latest data points to a narrowing of the appraisal gap that had previously widened during the early part of the pandemic, which "represents an encouraging trend."
Among the states studied, five — Connecticut, Minnesota, Oklahoma, Rhode Island and Washington — actually reported a smaller percentage of low appraisals in minority tracts compared to white tracts.
But in six states — Alabama, Delaware, Kentucky, Mississippi, New Mexico and Texas — the appraisal gap had widened.
"In all other states, minority tracts continued to have a higher percentage of low appraisals as compared to white tracts, but the gap narrowed substantially," the report concluded.
Broken down by metro areas, Las Vegas had the largest minority appraisal gap at 11.2%, followed by Memphis (11%) and Fort Lauderdale (10%). Allentown, Pennsylvania had the lowest on the list with a -8.6% gap, followed by New Haven, Connecticut (-6.6%) and Wichita, Kansas (-6.1%).
Several previous studies have shown how the appraisal gap has an impact on wealth-building, particularly in majority-Black neighborhoods. A 2022 Brookings study, for example, found homes in those neighborhoods were nearly twice as likely to be appraised under the contract price. That inequity was a driving factor in the formation of the PAVE Task Force.