Redlining continues in low minority Oklahoma home values. Should the appraisal process be changed?
Kimberly Robbins grew up in northeast Oklahoma City, in a mostly Black community that she loved.
But now as an adult and a real estate agent, she's cognizant of how home values in her neighborhood have been held back, failing to appreciate at the same rate of similar properties in different, mostly white parts of the city.
It's a common disparity that has been recognized across the country in the real estate industry.
Many agents say the disparity is driven by racism — often unconscious — that continues to lurk in mortgage lending, more than 50 years after the 1968 Fair Housing Act, propped up by bias ingrained in the property appraisal process.
"I call it modern-day redlining," said Anya Mashaney, a real estate broker and owner of Spaces Real Estate, referring to when the federal government outlined Black neighborhoods in red ink on official maps from the Federal Home Loan Bank Board, a precursor to the present Federal Housing Finance Agency.
"It's uncanny. If you look at historical redlining maps, and then you look at the difference between the green areas and the red areas, in the modern day those values are still the same," said Mashaney. "If we stopped redlining, then why didn't they appreciate at the same rate?"
Robbins and Mashaney have taken the lead on an initiative by the Oklahoma City Metro Association of Realtors to "start a conversation" about appraisal bias and the persistence of devalued neighborhoods.
For Robbins, it's not just business, it's personal.
"I want to make a positive change in my own community, the Black community," Robbins said. "I have a passion for it to be successful, for people to want to live there. I grew up in a beautiful home. I had a beautiful experience living there, and I want everyone to have that experience."
Robbins, a real estate agent with West and Main Homes, is working on that change in part by serving as the 2023 chairperson of the Oklahoma City Metro Association of Realtors Diversity, Equity and Inclusion Committee.
The Realtors' diversity committee aims to "identify diversity and fair housing education needs and goals," and to "promote changes in real estate business practices to reflect the growing cultural diversity within the United States."
"I want the people who've been in those communities living for 30, 40, 50 years, when they sell their home, to get the full value of that home for their families," Robbins said. "Because that is the road to wealth and wealth building."
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Why would a house on NE 18, in a mostly Black part of Oklahoma City, be worth significantly less than a similar house — almost exactly the same size and condition, and about the same age — as a house on NW 25, which is not in a mostly Black neighborhood?
Redlining has been illegal since 1968, but critics say its effects linger in home values that not only did not keep up over the years with values in general, but could not keep up, and cannot catch up, because of lending practices tied to what is regarded as the bedrock axiom of real estate value: location.
"That's the issue. That's the issue we're tackling, is over time they should have increased in value," Robbins said.
It has resulted in generations of families unable to take advantage of the wealth creation that comes with homeownership.
Wealth accumulates in homeownership as a house increases in value. That wealth is often inherited by the next generation, but Robbins says people of color miss out on that over time and generations because they were shortchanged. Homes were historically undervalued as part of the mortgage lending process, and that problem is compounded by racism built into the system today.
It's not as simple as saying "some appraisers are racists," although a study last year found "racial and ethnic valuation gaps" in appraisers' opinions of value. It's mainly that the system is effectively racist, experts who seek change say, although individuals' implicit bias in favor of, or against, racial and ethnic groups does come into play.
Some of those experts complain Fannie Mae and Freddie Mac, which arguably drive the mortgage market in general, and the lenders they deal with, continue to sidestep perceived risk by requiring appraisers to judge the value of a given home based on proximity and the value of nearby homes.
Fannie and Freddie drive the mortgage market by buying loans from lenders, then bundling them together to sell as mortgage-backed securities to investors. Lenders use the cash raised by selling mortgages to make more loans. Nobody wants to make, buy or sell loans perceived as risky.
Advocates for housing finance reform say the housing and lending markets alone are stymied in minority neighborhoods because the markets provide no incentives for the home finance system to adjust. Past, imposed devaluation persists, they say, because the system generally requires appraisals to be based mostly on comparable, nearby home values and not homes in other, farther-away neighborhoods.
The committee Robbins and Mashaney are part of "is working really hard to pull a lot of the members and the community together to attack racial bias in a lot of ways, but specifically in the appraisal arena," Robbins said. "We know that it exists (nationally). But what do we do here locally, and how do we combat it locally in our community every day?"
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The work has just begun, said Mashaney.
"This is the start of it. We need to bring attention to the issue and get that conversation started, and hopefully people that believe they may have experienced that personally will then know what to do going forward, how to report it if it happens again, and share those stories, so that we can have that information to hopefully combat that.
"So Part One is awareness. Then, I think we've got a lot of education to do, not just for our membership but for our community."
An example of the apparent legacy of redlining in Oklahoma City
The Oklahoman asked a local appraiser for assistance in demonstrating the disparity in the value of two similar houses, one in northeast Oklahoma City and one in northwest Oklahoma City.
He did not conduct on-site appraisals, which cost several hundred dollars, but used software commonly used by appraisers and lenders that also limits acceptable comparables by proximity: Freddie Mac's Home Value Explorer, a kind of Automated Valuation Model, or AVM.
A lender might rely on an AVM rather than an appraisal on a lower-risk loan, say, a refinanced mortgage, or one with a lower-than-usual loan-to-value ratio because the borrower is making a higher-than-usual down payment. A valuation based on an appraisal would be nearly the same as the values ascertained using the AVM, the appraiser said.
The differences were stark.
A house on NW 25, with 1,335 square feet, built in 1922, was worth $214,277 on Oct. 25, according to an AVM.
A house on NE 18, with 1,312 square feet, built in 1928, in comparable condition, was worth $156,319, or 27% less.
For the house on NW 25, six comparable sales considered were less than a mile away.
For the house on NE 18, five of the six comparable sales considered were less than a mile away.
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So what could be done?
Some want to level the home finance playing field by expanding the field itself.
Barbara Heise, a real estate agent with RE/MAX Results in St. Louis and cofounder of the group With Action LLC, proposes using a wider range of comparable homes when appraising a property.
"In other words, using like-kind homes in a majority-white neighborhood as comparables for declining Black neighborhoods," Heise said.
Heise's group With Action is a grassroots organization concerned about "saving middle neighborhoods and disrupting concentrated poverty" by advocating for change to systemic discriminatory policies.
Heise and co-founder Rosalind Williams, an urban planner, explained their proposal during a recent webinar presented by the American Society of Appraisers.
"A vital piece of our Restorative Appraisals Proposal is to target streets and neighborhoods, in the declining neighborhoods, by using an assurance program as an incentive for buyers and lenders to invest in an area," Heise said.
She was referring to home value assurance funds set up to guarantee that home equity doesn't erode. Programs in Chicago, for example, are funded by an annual tax on property owners in an area, and participants are covered for lost value when they sell a house if they've kept their property taxes paid and lived in the house for at least five years.
But expanding the geographic areas where appraisers look for comparable properties would remedy persistent low valuations, she said.
"Current Fannie Mae guidelines reinforce low values with their location-slash-boundary restrictions, which keep the comparables in the same or other Black neighborhoods," Heise said. "Using comps from a declining neighborhood compounds declining values."
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She and others in the presentation emphasized this is not necessarily reflective of the appraisers themselves, who have to work under Fannie Mae regulations on geographic areas.
"Appraisers are kind of stuck in a box," said Douglas Potts, founder of Delta Real Estate Analytics LLC in St. Louis. "And I think it's important to not take what we have been taught, which is basically filtered down through the federal agencies, as the only way to attack this issue, because the concept is if we could look at these data points differently, we could avoid some of the structural bias that we see occurs."
For its part, Fannie Mae says it is taking steps to deal with appraisal bias, but it emphasizes increasing racial diversity among appraisers. And it still anchors appraisals to neighborhoods.
Freddie Mac research published last year showed that "appraisers' opinions of value are more likely to fall below the contract price in Black and Latino census tracts, and the extent of the gap increases as the percentage of Black or Latino people in the tract increases," and, that "Black and Latino applicants receive lower appraisal values than the contract price more often than White applicants."
Although Freddie Mac did consider the location of comparable properties and found "the average distance between a subject property and its comps is substantially smaller when the property is in a Black or Latino tract than in a White tract" — 1.4 miles on average for white-majority census tract, 0.82 mile for Black-majority tracts, and 0.73 mile for Latino-majority tracts — it looked mostly at appraiser decision-making, not limitations on data tied to geography.
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Mashaney and Robbins also point to personal bias, whether implicit or overt, as something to be dealt with, in addition to historic and systemic bias, by the Realtor committee and community leaders.
"Appraisal biases can happen consciously and unconsciously," Mashaney said. "You might consciously do something. But you might unconsciously drive into a community that you perceive as being a community of color, or drive by a place of worship that isn't your preferred place of worship, that sets something off in your brain — the appraiser's — that that property would be worth less in their mind because of their already held beliefs."
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Senior Business Writer Richard Mize has covered housing, construction, commercial real estate and related topics for the newspaper and Oklahoman.com since 1999. Contact him at rmize@oklahoman.com. Sign up for his weekly newsletter, Real Estate with Richard Mize.
This article originally appeared on Oklahoman: Redlining, appraisal bias linger in minority Oklahoma home values
