The Appraisal Bias Debate: Technology's Role and Its Limitation
Let's take a closer look at the article "Can Advances in Valuation Technology Eliminate Appraisal Bias?" published on CUInsight. While the author aims to address the persistent concerns of bias in real estate appraisals, the article seems to push for a shift towards Automated Valuation Models (AVMs) as a solution to these biases. However, when we break down the argument, there are several issues worth discussing, particularly regarding the contradictions and potential commercial interests driving this narrative.
The Contradictory Nature of AVMs vs. Appraiser Data
The article brings up the question of whether traditional appraisals performed by real estate appraisers are even necessary, citing advancements in technology like AVMs. According to the article, millions of appraisals have entered systems like the Uniform Collateral Data Portal (UCDP), providing a high volume of accurate and consistent data that AVMs now rely upon. Here’s where the argument becomes murky: if appraisals are supposedly rife with bias, how can the AVMs be any better when they rely on the same appraisal data to function?
It’s a contradiction that undermines the argument for replacing human appraisers with AVMs. On the one hand, appraisals are described as potentially biased, but on the other, they are also labeled as accurate and consistent enough to serve as a foundation for AVM technology. So, which is it? Are traditional appraisals systemically flawed, or are they reliable sources of data? This inconsistency raises more questions than it answers.
There is no clear evidence provided in the article regarding what percentage of appraisals are genuinely problematic due to a bias. Without a specific percentage or a broader scope of how many appraisals suffer from credibility issues, it’s premature to suggest shifting the entire valuation process to AVMs. It begs the question: If the majority of appraisals are credible, why move away from them altogether? Instead, isolated cases of bias, whether they are credible or not, seem to be shifting the conversation in favor of AVMs, systems that ironically depend on the same data appraisers provide.
Commercial Interests Driving the Push for AVMs?
This leads us to another point that needs to be addressed: the potential commercial motivations behind this push. The article's author works for Class Valuation AMC, a company that profits from integrating technology into the valuation process. This affiliation calls into question the impartiality of the article, as it seems to promote AVMs and the company’s ‘technology-based solutions’ more than addressing the root problems within the appraisal process itself.
Class Valuation's intended role is to act as a conduit between appraisers and lenders, helping to eliminate undue pressure on appraisers to conclude specific values that might suit lender interests, precisely the kind of problem that led to the Savings and Loan crisis mentioned in the article. Ironically, the real issue at hand seems to be that far too many Appraisal Management Companies (AMCs), often prioritize finding appraisers willing to work for the lowest fees. This profit-maximization strategy can degrade the overall quality of appraisals, as appraisers selected based on low fees may not offer the best quality or expertise. By pushing for AVMs, companies like Class Valuation can keep more profit, as AVMs reduce the need for experienced appraisers.
Examining the Limitations of the Brookings Institute Study on Neighborhood Pricing
The article also references a 2018 Brookings Institute study, The Devaluation of Assets in Black Neighborhoods, to support the claim that appraisal bias significantly contributes to housing inequality. While the Brookings study found that homes in Black neighborhoods were valued 23% less than similar homes in predominantly white neighborhoods, it failed to conclusively establish that this separation in value was purely due to appraisal bias. The study itself acknowledges the influence of various factors, including land values, historical housing policies like redlining, and socioeconomic status, which can all impact property values. Critics, including researchers from the American Enterprise Institute (AEI), argue that by not controlling for these factors, the Brookings study presents an incomplete picture. AEI's analysis suggests that when accounting for borrower credit risk scores, the devaluation for properties in Black neighborhoods drops to a mere 0.3%. This raises crucial questions about the emphasis placed on racial bias in appraisals when other variables are at play.
Rather than using the Brookings findings as a blanket statement on appraisal bias, the conversation should focus on the broader, more nuanced variables that influence home values such as proximity to amenities, quality of schools, and infrastructure dynamics. By oversimplifying the issue and attributing disparities solely to appraisal bias, we risk ignoring the complex socio-economic factors that contribute to these valuation differences. The rush to enact regulatory reforms based on this singular narrative not only misrepresents the intricacies of home valuation but also places undue blame on appraisers for systemic issues rooted in socioeconomic inequality.
Bias in appraisals is unequivocally detrimental and should never be tolerated within the profession. Appraisers strive to uphold integrity and objectivity in their valuations, reporting the data that reflects market conditions and property characteristics. It is crucial to recognize that appraisers, as a group, should not be unfairly penalized for simply being the bearers of the data, which can sometimes reflect broader systemic issues.
Just as we don't hold metorologists responsible for the storms they report on, we must recognize that appraisers are not the architects of market discrepancies. They serve as the intermediaries, translating market realities into valuations based on the data available to them, rather than creating those realities themselves.
Is Technology the Solution to Bias?
Another issue is the article’s focus on technological innovations, especially Automated Valuation Models (AVMs), as the cure for bias in the appraisal profession. As we’ve discussed, AVMs are not independent of human appraisal data; they rely on appraisal data to function properly, so any inherent bias within appraisals would naturally carry over into AVM results. Moreover, AVMs are not without their own limitations. They depend on the availability of accurate public records and Multiple Listing Service (MLS) data, which is often inconsistent, leading to inaccuracies in valuation.
Appraisers spend significant time vetting data that may be inputted incorrectly into MLS listings or may be interpreted differently from one location to another. For instance, a property’s physical features, such as square footage, may be measured or calculated differently across various jurisdictions, leading to confusion and misinterpretation for those who are not specifically familiar with the local process. MLS listing data can vary significantly in its comprehensiveness; some areas may have detailed and robust listing data, while others might only provide minimal information. This inconsistency can impact appraisers' ability to make accurate valuations, further highlighting the importance of their expertise in navigating these discrepancies.
The experience of appraisers is vital in understanding overall quality and condition ratings, as well as key components that affect the marketability of a property. This human component is crucial, especially in an industry where emotional factors play a significant role in home buying, elements that machines currently cannot grasp.
While the article suggests that technological advances like AI and machine learning can improve valuation accuracy, this is not a guaranteed fix for bias. Technology alone cannot replace human expertise in understanding nuanced factors that affect property value, such as unique property features or local market trends.
Parting Remarks: A More Balanced Approach
The article from CUInsight seems to be more of a promotional piece for Class Valuation than an objective analysis of how to address bias in the appraisal industry. While it's true that the industry has room for improvement in terms of overall quality level, the answer is not to simply replace appraisers with automated systems that depend on the same allegedly flawed data. A more balanced approach would involve raising the bar for appraiser qualifications and improving regulatory oversight. Specifically, it is crucial to reexamine the role of Appraisal Management Companies (AMCs) in the valuation process. By removing AMCs from the valuation side, we can restore their intended function as a firewall that protects appraisers from bad faith actors on the lender’s side. It is important to delineate AMC fees from appraisers' fees to incentivize AMCs to choose quality appraisers rather than those who simply accept the lowest fees. Furthermore, holding AMCs accountable and conducting annual audits of their processes can help ensure they are not colluding with lenders or engaging in practices that compromise appraisal integrity. Additionally, eliminating the ability of AMCs to operate as appraisal companies with staff appraisers can help mitigate monopolistic tendencies and foster a more competitive and transparent appraisal market in general.
In the end, appraisers should be held to the highest standards of professionalism and integrity, with a clear focus on improving accuracy, reliability, and credibility in the industry. Claims of bias in appraisals often arise when individuals are dissatisfied with a valuation, but there is no systemic proof of widespread bias; instead, it appears to be the behavior of a small number of individuals. Most complaints lack substantial evidence and primarily involve appraisers hired by Appraisal Management Companies (AMCs), which frequently prioritize cost over quality by selecting the cheapest appraisers. This cost-cutting approach often leads to hiring less experienced professionals who may not thoroughly understand the complexities of property valuation. Therefore, it is essential to address the shortcomings of AMCs in their selection processes rather than simply attributing valuation discrepancies to alleged bias among appraisers. The focus should be on ensuring that appraisers are properly vetted and that the profession is held to high ethical standards.
Bonus Words
It’s quite ironic how some Appraisal Management Companies (AMCs) have morphed from mere management firms into full-fledged valuation companies. They’re not just managing appraisals anymore; they’re hiring staff appraisers to fill in the gaps and pushing for Automated Valuation Models (AVMs) wherever possible. This shift has turned them into monopolies in the valuation landscape, effectively sidelining many qualified appraisers from the process. It’s as if they’ve decided to take over the entire kitchen while locking out the chefs who know how to make the best dishes! With regulations further entrenching this monopoly, we have to ask ourselves: are we really promoting a fair and diverse appraisal market, or are we simply handing over the keys to the AMCs, who are more interested in streamlining their profits than in maintaining quality and integrity in valuations?