Reena Agrawal: How AVMs Can Promote More Equitable Home Valuations


PERSON OF THE WEEK: Minority communities are facing significant hurdles in their quest to build equity and accumulate wealth when it comes to access to credit and homeownership. The housing sector has been a prime focus of the debate on this wealth gap, as alleged racial bias in appraisals and other valuation solutions is a main concern. As industry stakeholders continue investigating racial discrimination in the housing market, many have begun to trace these biases to where they started.

Although the Fair Housing Act of 1968 made the practice of redlining illegal, there is a contention that historically biased data may still influence property valuation solutions, as biased data could be embedded in algorithms used to determine property values. 

Given the enormity of racial disparities, the housing industry is working to address this issue and many others that may be holding minority homeowners or prospective buyers back. This has led to a renewed focus on the need for greater transparency and accountability in the appraisal process and testing any valuation methods for biases.

To learn more, MortgageOrb recently interviewed Reena Agrawal, research economist at Veros Real Estate Solutions.

Q: How did redlining first begin to impact the housing industry?

Agrawal: The origin of redlining can be found in the policies developed by the Home Owners Loan Corporation (HOLC), created in 1933. The government sought to reduce home foreclosures during the Great Depression, and the HOLC was a temporary program that purchased underwater mortgages and refinanced them at easier terms for borrowers. 

While developing this program, the HOLC created color-coded maps that evaluated urban neighborhoods for mortgage risk, which factored in the target property’s attributes and the characteristics and racial composition of the neighborhood the property was in. The color-coded system designated red areas as “high risk” and ineligible for federal mortgage insurance. 

Black residents occupied a considerable proportion of those red-rated neighborhoods, so these neighborhoods were denied access to the financial resources necessary for home ownership and improvements.

Q: Is redlining still impacting homeowners today?

Agrawal: Some researchers have found that long-term, these discriminatory policies have resulted in neighborhoods with lower household incomes, a greater likelihood of prevalent poverty, and lower credit scores.

Additionally, the research found that housing segregation still impacts the financial well-being of minority households. Practices like redlining prevented Black families from purchasing homes in white suburban areas and forced them to remain in economically disadvantaged neighborhoods, often as renters. Limited credit opportunities have also hindered neighborhood and community development, widening the homeownership and wealth gap that minority households face. 

One modern-day outcome of historical redlining is that homes in these redlined neighborhoods typically have lower living areas and lot sizes than homes in non-redlined areas, leading to lower median house prices than larger homes. This has negatively impacted minority homeowners, which are disproportionately located in these areas and have faced significant barriers to homeownership and wealth accumulation. 

Policymakers and industry leaders alike must continue to prioritize fair housing practices and work towards dismantling the systemic barriers that have kept so many minority households from achieving financial stability and security.

Q: What can lenders and appraisers do to more accurately evaluate homes? 

Agrawal: One way industry can work towards dismantling these barriers is through the use of technology. By using automated valuation models (AVMs) that have been assessed for accuracy and bias, lenders can check whether appraisals or other sources of property valuation may be at risk for incorrect valuation based on a property’s location in a historically redlined area. 

Appraised values that line up with the valuation delivered by a trusted AVM would generally be deemed a low risk for bias. However, appraisals that come in significantly different from a trusted AVM could be flagged for a more detailed review for potential bias. 

A benefit of using AVMs is that they do not rely on any data related to historical redlining maps or demographic information concerning the parties involved in real estate transactions – they only know about the property and its characteristics. Another benefit of AVMs is that they are low-cost and easy to use, making it possible to run an analysis quickly and efficiently against each appraised property. 

In an environment where accuracy and fairness are critical to the transaction’s success, AVMs can be an invaluable tool for quality control regardless of the valuation product or service.

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