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A toxic mix of redlining and discrimination means homes in Black neighborhoods are chronically undervalued to the tune of $156 billion

Submitted by Tech Insider on September 16, 2020 - 12:05pm

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Tiffany Aliche already knew the deal. She'd heard stories about how homes owned by Black people are often undervalued in the marketplace. However, she didn't expect to have her own tale to tell. 

Earlier this year, she was planning to do a cash-out refinance on her home; the process requires an appraisal. Aliche, founder of The Budgetnista, a financial education company, went in with eyes wide open — if the country hadn't been under quarantine, she says, she would have had a white friend pretend to be her when the appraisers came, and put away her family photos. 

Still, she hid personal photos for the appraiser's visit, but there was no getting around the fact that her home was in a predominantly Black neighborhood in Newark, New Jersey. The appraiser valued the five-bedroom, three-and-a-half-bath home with a finished basement, two laundry rooms, all new plumbing and electric, and other bells and whistles at $390,000. 

"I was disheartened, disappointed, but sadly, not surprised," says Aliche, who paid $800 for the appraisal.

She knew it was low. Aliche asked a realtor to check comparable sales of homes nearby; they determined the appraisal was at least $30,000 too low, especially given the fact that the home is in a historic district and at the time homes were selling at new highs. 

Aliche decided not to go forward with the cash-out refinance, so she didn't challenge the appraisal. But the experience still stings. "When so much of your wealth is tied to home ownership, how do you make up for the gap when your home is undervalued? You can't outwork racism," she says.

Homes in Black neighborhoods are regularly undervalued in the US

Her experience is not unique. 

According to a 2018 report from the Brookings Institution, owner-occupied homes in majority-Black neighborhoods are undervalued by $48,000 per home on average, amounting to a cumulative loss of $156 billion nationwide. That deficit is a big reason Black wealth could drop to zero by 2053, according to the nonprofit Prosperity Now

Things are not moving in the right direction. According to the Urban Institute, since the Great Recession, the gap between Black and white homeownership rates in America has increased to its highest level in 50 years, from 28.1 percentage points in 2010 to 30.1 percentage points in 2017. White homeownership is 71.9% compared to 41.8% for Black Americans. This gap is wider than when race-based discrimination against homebuyers was legal. 

The Brookings Institution uses median neighborhood home price data from Zillow to calculate how much homes in majority-Black neighborhoods are undervalued compared to neighborhoods with no Black residents. "Structural characteristics of homes and neighborhood amenities do not fully explain the absolute difference in home value," Brookings notes.

The high cost of devaluation

The impact of this widespread devaluation is huge. "Home equity can be used for college funding for your children, to start a business, or a refinance can help you weather a finance crisis," says Michael Neal, a senior research associate with the Urban Institute. "Less equity curtails downstream benefits."

John Kilpatrick, president of Time for Homes, a charity that works to combat homelessness, and author of "Real Estate Valuation and Strategy," offers an example of how devaluation can impact a household. 

He says to look at two families purchasing homes in different neighborhoods — one disadvantaged neighborhood, one upscale. They each invest $10,000 in equity in a new home. The home in the disadvantaged area costs $100,000 and has a $90,000, 4%, 30-year mortgage. The upscale-neighborhood home costs $200,000, and has a $190,000, 4%, 30-year mortgage. 

The home in the disadvantaged neighborhood grows in value by 2% per year. The upscale home grows in value by 4% per year. After 10 years, accounting for value increase and mortgage pay-down (ignoring taxes and insurance and other costs of ownership), the equity build-up in the disadvantaged home is $50,993. However, in the upscale home, the equity build-up is now $146,359, or nearly three times as great on the same initial investment.

How does this kind of devaluation persist?

Does the calendar say 2020 or 1920? Despite laws outlawing discrimination and redlining (the practice of refusing a loan to someone because they live in a poor or majority-Black area), the racial divide in real estate remains.

There are laws on the books to keep these practices at bay, but enforcement of them is another matter. Plus, there is a movement to tinker with existing protections. Currently, the Trump administration is attempting to roll back rules designed to help eliminate racial segregation in suburban housing. 

Though there has been progress in eliminating redlining practices, the damage has been done. Historically, minorities were pushed into strictly defined neighborhoods, and those neighborhoods often have commensurately underfunded, underperforming schools. 

Another reason Black-owned homes are undervalued is because of historically discriminatory urban and regional planning. "Many Black and brown communities were intentionally 'placed' in areas with less resources and less potential for growth," says Rohan Arora, the executive director and founder of The Community Check-Up, an organization focused on environmental health education. "The bulk of Black and brown communities historically were forced to live in areas where corporations don't invest as much of their money, causing property values to be lower than communities where investment is high."

Arora also notes that environmental racism is a factor contributing to the racial wealth gap. BIPOC groups experience more health hazards near their homes due to contaminants that also shape property values. Many low-income BIPOC families live next to coal-burning plants, factories, and refineries, which leads to health issues, food insecurity, housing devaluation, and more, Arora says.

Changing the appraisal system

By far, what can't be overstated is the significance of the role appraisers play in undervaluing homes.

Heather Wilson, a real estate agent in Milwaukee, explains, "Certain appraisers are finding things that would reduce the value of a home (commute time, crime rate, etc.) but then doubling what the reduction would normally be. This racism in the system is further proven when you take out both commute time and crime rate and instead compare it to amenities like neighborhood pools, and you'll still find that in neighborhoods where the majority of homeowners are Black, properties still seem to have lower valuations than other similar non-majority-Black neighborhoods."

Why not just get a second appraisal if you think the first one is unfair? It's an extra cost and it can be tricky. If you're the seller, the lender has to be the one to request an appraisal. While getting a second appraisal wouldn't completely fix the issue, it would definitely keep appraisal officers in check if their appraisals are consistently coming in low compared to the second appraisal officers' estimates.

Wilson says another way to fix the issue is to create a national standard for appraisers to follow. Currently, standards for appraisals can differ slightly per state, since appraisers are regulated by local agencies.

What you can do if your home has been undervalued

First, you can contact the National Association of Realtors and complain. "They are good at hammering redlining," says John Crossman, a consultant who has worked to create real estate programs in Historically Black Colleges and Universities. You can also turn to the Department of Housing and Urban Development and your local housing authority.

Gather the proof you need to show that your home should be valued higher. Be sure the appraiser included the right comparables — comparisons to other recently sold homes in your area. Check with Realtor.com and Zillow. Double check to see that any upgrades you've made to your property, like a kitchen renovation, are highlighted. Unfortunately, the burden is on you to track and verify what the appraiser included in the report. 

What would help, experts agree, is if there were more Black people throughout the real estate world. At present, over 85% of appraisers are white, and just 3% are Black.

Stats like that are part of the reason Crossman is big on getting real estate programs into HBCUs — to not only educate BIPOC individuals about home ownership and real estate as an investment opportunity, but also to promote career options in the field. He's trying to raise money in the private sector to get more real estate programs in Black colleges. Says Crossman, "People who own real estate control kingdoms."

This story is part of Business Insider's "Inside the racial wealth gap" series.

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