Property Appraisal and Valuation Equity (PAVE) describes the goal of having property appraisals free from racial, ethnic or other form of bias. In other words, access to property assessments and the property values reported by them should be equitable.
Historically, home valuations have been affected by inequality, bias, and discrimination that has disproportionately affected people from communities of color. This inequality in home valuations has contributed to the racial and ethnic wealth gap in the United States: This means that there are significant disparities in homeownership rates between people of different races and ethnicities. different, and in the financial returns associated with owning a home. . In 2022, the median white family holds eight times the wealth of the typical black family and five times the wealth of the typical Latino family.
PAVE has been a concept and a goal for many years. However, in 2021, President Joe Biden announced the creation of a task force to assess the causes, extent and consequences of evaluation bias and to produce a set of recommendations aimed at reducing racial and ethnic bias. in home valuations.
Key points to remember
- Property Appraisal and Valuation Equity (PAVE) states that property appraisals should be unbiased.
- Subjective judgments in the home appraisal process can allow bias to affect a property’s valuation. Researchers have observed a gap in market value between majority black and majority white neighborhoods over the decades.
- Unfairly undervalued appraisals can have an outsized impact because for many families, property is the biggest asset they own.
- Systematic undervaluation of properties in a neighborhood can have a significant effect on property values and 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 Real Estate Appraisal and Valuation
PAVE describes a situation in which home appraisals and appraisals are fairer than they are today.
Whether you’re buying a home with a mortgage, refinancing your existing mortgage, or selling your home to someone other than a cash buyer, a home appraisal is a key part of transaction. There are different methods of assessing value. Typically, appraisers use Fannie Mae’s Uniform Residential Appraisal Report for single-family homes. The report asks the appraiser to describe the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides analysis and conclusions on the value of the property based on their observations.
The home appraisal process involves subjective judgments, and these can allow biases to affect a property’s valuation. Researchers have observed a market value gap between majority black and majority white neighborhoods for decades. On average, homes in majority black neighborhoods are worth less than half those in majority white neighborhoods. Objective measures of a property’s characteristics, such as the age of the property or its proximity to public transportation, do not explain all of the disparity.
One of the reasons for this is suggested by more recent studies of the “evaluation commentary” that is part of evaluation reports. This is a free-form narrative section where the appraiser can detail their reasons for appraising a property the way they did. Research has found that appraisers sometimes make racial and ethnic references and use them as a basis for lowering a home’s appraised value.
For example, according to a recent lawsuit in California, when the appraisal of a home in the Bay Area of a black family was surprisingly lower than expected, she asked a white friend to pose as the owner. . The next valuation went up about $500,000.
The impact of property valuation and valuation equity
Inequitable valuations, that is, a valuation of a property that is lower than the contract price, can have significant effects on individuals and communities.
For individuals, an appraisal is an important part of the home buying process because it establishes the value of the property for a home loan. A lower than contract appraisal can sometimes result in a higher down payment required for the home buyer, which can result in a failed sale. In addition, home ownership in the United States accounts for a large portion of wealth creation, with estimates placing two-thirds of a typical American household’s wealth in home equity. An unfairly low assessment can prevent families and people of color from accessing a range of financial tools and products associated with the equity they hold in their home.
Unfair assessments can also impact entire communities. This is because appraisers look at purchase prices in a neighborhood as part of their appraisals – and these purchase prices can also be influenced by racial or ethnic bias. Each instance of a lower purchase price becomes a candidate for the next appraiser to choose as the comparable sale for the next appraisal in the community, carrying the impact of the lower value forward. Over time, even a slight imbalance of undervaluation can have a significant effect on the value of properties in a community, and therefore on the accumulated wealth of homeowners in that community.
Bias and discrimination in property valuations have been a structural barrier to homeownership in the United States. More than 50 years after the passage of the Fair Housing Act, the racial gap in homeownership is wider than ever: in 2021, the black homeownership rate reached just 44 %, while the homeownership rate for whites reached 74%.
Research also suggests that biases are becoming more pronounced. According to data from the US Census Bureau, a neighborhood’s racial makeup is more valuable in 2015 than it was in 1980, which researchers have identified as a key factor in the growing racial wealth gap. Over that 35-year period, homes in white neighborhoods appreciated about $200,000 more than similar homes in communities of color, the researchers found.
The PAVE working group
There have been a number of attempts to reduce bias and discrimination in home appraisals. However, on June 1, 2021 (the centennial of the Tulsa Race Massacre), President Biden announced the creation of an interagency initiative, the PAVE Task Force. The working group was tasked with:
- Assess the causes, extent and consequences of evaluation biases
- Establish a set of transformative recommendations to eliminate racial and ethnic bias in home appraisals
PAVE is a unique interagency task force and represents the most serious attempt to reduce discrimination in home assessments in decades. The task force includes 13 federal agencies and offices and is chaired by Domestic Policy Council Director Ambassador Susan E. Rice and US Housing and Urban Development Secretary Marcia L. Fudge.
So far, PAVE has initiated an independent review of the Uniform Standards of Professional Assessment Practice (USPAP) to understand potential barriers to entry for underrepresented communities. Additionally, in November 2021, the Federal Housing Administration (FHA) issued a letter to mortgagees to clarify non-discrimination requirements applicable to appraisers and lenders.
Has racial discrimination affected home valuations?
Yes. Many studies have shown that homes in white neighborhoods receive higher ratings than those in minority communities, and the problem is getting worse, not less.
What solutions to home valuation inequalities have been proposed?
Proposed solutions include training on how to avoid unconscious racial bias, updating ethics and professional guidelines, and scholarships to increase diversity among home appraisers.
What can I do if I am a victim of home valuation bias?
Property Appraisal and Valuation Equity (PAVE) is the concept and purpose that real estate appraisals should be unbiased. The home appraisal process involves subjective judgments, which can allow bias to affect a property’s valuation. Researchers have observed a market value gap between majority black and majority white neighborhoods for decades.
Appraisals that unfairly undervalue a property can have significant effects. The greatest asset for many families is their home. And the systematic undervaluation of properties in a particular neighborhood can have a significant effect on the property values of that community, and therefore the accumulated wealth of homeowners who live there.