TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1334848
M REPORT | 55 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Quantifying Racial Disparity in Home Valuations Contactless appraisals hold promise when it comes to reducing costs and increasing accuracy, but a group of researchers have looked into the model's accuracy. A s professionals from all industries search for ways to work more effi- ciently and safely during a national health crisis, property appraisers have turned to auto- mated valuation models (AVMs), which allow for contact-free assess- ment of a home's market value. Researchers at the Urban Institute acknowledged that AVMs hold promise when it comes to re- ducing costs and increasing accura- cy, and they write that the practice has helped keep the housing mar- ket moving during the COVID-19 pandemic. Still, in a late-December study, they found that AVMs in majority-Black neighborhoods pro- duce larger errors, relative to the underlying sales price, than AVMs in majority-white neighborhoods, potentially contributing to the wide housing wealth gap between Black and white homeowners. Researchers Michael Neal, Sarah Strochak, Linna Zhu, and Caitlin Young, who wrote the paper entitled "How Automated Valuation Models Can Disproportionately Affect Majority- Black Neighborhoods," say that historically, appraisals, including in-person appraisals, have been tainted by bias. "AVMs have drawbacks," the authors wrote. "Historically, AVMs have not been able to take a prop- erty's condition into account when determining a home's value. Like in-person appraisals, the accuracy of AVMs depends on having a large-enough number of compa- rable sales in the area to ensure greater accuracy. And the use of comparable sales in the area may reinforce past racial bias." The report, which can be accessed in full on Urban.com, examines key drivers of the mag- nitude of inaccuracy and how they differ among neighborhoods. For example, the authors found that the percentage magnitude of inaccuracy in majority-Black and majority-white neighborhoods may be similar, the lower sales prices in majority-Black neighborhoods increase the percentage magnitude of inaccuracy significantly in all three cities we examined, pos- sibly causing greater damage to the overall home values in these neighborhoods. The Institute's findings suggest that the expanded use of AVMs could disproportionately affect majority-Black neighborhoods and reinforce the impacts of past racial discrimination that often resulted in the undervaluation of Black-owned homes. According to the researchers, a significantly lower appraised value, even from an AVM estimate, could lead to a canceled sales contract, which can contribute to the Black-white homeownership rate gap and the Black-white wealth gap. "When aggregated across soci- ety, these risks also have implica- tions for policymakers responsible for macroeconomic and financial market supervision. More research is needed to identify the full scope of policy implications stem- ming from AVM inaccuracy," the authors noted. "Nevertheless, the policy suggestions we present are meant to ensure that as the use of AVMs increases, its costs are better understood and more progress is made to ensure that all households experience the benefits of home- ownership.