For homes located in majority-minority neighborhoods, appraisal bias usually results in low home valuations. Unless they lower the price of their home or risk losing the sale, minority sellers will have to lower the price of their home if the appraised value is lower than it should be because of appraisal bias. As a result, these sellers ultimately receive far less money for their homes than sellers in other neighborhoods. When sellers don’t understand why similar homes in white neighborhoods cost more than theirs, this can negatively impact them.

Are minority homebuyers affected by appraisal bias? Of course. In most cases, minority buyers cannot buy a home without a mortgage, and lenders won’t finance properties that don’t match the buyer’s budget. Minority buyers are therefore forced to come up with more cash if the appraisal is low, or they risk losing the property to an all-cash buyer. A low appraisal creates a difference that minorities are less likely to be able to cover with family funds. In other words, appraisal bias is detrimental to them in more than one way.

Appraisal Gap in Minority Neighborhoods

In minority neighborhoods, there are a lot of indications that there is an appraisal gap. An analysis of 12 million appraisals by Freddie Mac over a five-year period found that Black and Latino neighborhoods had lower opinions of value than white neighborhoods did. GSE researchers found that the gap was larger in neighborhoods with more Black and Latino residents.

Despite the negative impact of appraisal bias, there is one bright side – awareness of it is increasing. A number of steps have been taken by the appraisal industry to address appraisal bias. In addition, the Biden administration recently announced a plan to combat racial bias in appraisals. We can only hope that these efforts will result in real change for those affected by the appraisal gap.