Freddie Mac Finds Home Appraisals in Black, Latino Areas More Likely to Fall Short
Lower-than-expected appraisals can threaten home sales, depress property values
Homes in Black and Latino neighborhoods appraise for less than their agreed-upon purchase price more often than in white areas, according to new research from government-backed mortgage giant Freddie Mac.
About 15.4% of single-family properties in majority-Latino census tracts and 12.5% of homes in majority-Black areas appraised lower than their contracted price between 2015 and 2020, Freddie Mac researchers found. The rate in white neighborhoods was 7.4%.
Appraisals are at the heart of the home-buying process: Lenders use them to make sure a property is worth enough to cover the mortgage. Independent appraisers look at a home’s condition, nearby sales of comparable properties and other factors to determine its value. If an appraisal comes in lower than the contracted price, a buyer might have to put up more money to cover the difference or risk the deal falling through.
Lower-than-expected appraisals can set a floor on a property’s value, limiting the equity a buyer can build over time. The values are then considered during future appraisals, potentially depressing property values throughout an entire neighborhood.