How to Make the Housing Market More Equitable
Please consider How to Make the Housing Market More Equitable by Andre M. Perry.
Mr. Perry’s research with colleagues has shown that houses are underpriced in majority-Black neighborhoods, a process he calls “devaluation.” That can lead to lower property-tax revenue to fund local schools and infrastructure in those neighborhoods and reduced wealth and discretionary income for Black families.
“We really wanted to see the impact of race on home price. And we controlled for education, crime, walkability, all those fancy Zillow metrics. And what we found is homes in Black neighborhoods are underpriced by 23%, about $48,000 per home,” says Perry.
Perry’s Cure: More Black Appraisers
“The way you get past what really amounts to a distrust of Black people is to invest in Black people. On the appraisal side, [that means] investing in the training of and development of Black appraisers.”
Appraisers Don’t Set Prices
Perry’s article is preposterous on many front but let’s start with a question regarding his alleged cure.
There are bidding wars in some places and no buyers in others. Why is that?
The obvious answer is buyers are willing to pay more than the asking price in some areas because they see value. They will not pay the alleged appraised valuation in other areas because they don’t.
Buyers, not appraises set prices.
Flawed Study
I took a dive into Perry’s flawed study. Some of what he says is accurate but his conclusions why are totally wrong. For example:
According to our analysis, differences in home and neighborhood quality do not fully explain the devaluation of homes in black neighborhoods. Homes of similar quality in neighborhoods with similar amenities are worth 23 percent less ($48,000 per home on average, amounting to $156 billion in cumulative losses) in majority black neighborhoods, compared to those with very few or no black residents.
Perry is No Judge of Quality
Perry is undoubtedly correct that homes of a similar size are priced lower in Black neighborhoods. He used Zillow data to conclude that. As bad as Zillow is about some things, square footages are likely to be accurate.
But who is Perry to assess quality of construction, interior design, neighborhood quality, and most importantly the price people are willing to pay for less crime and better schools?
Perry claims to adjust for crime and still comes up with an alleged 23% “devaluation”.
Yeah right. If the market disagrees, so do I.
Curiously, if city appraisers did what Perry wants (appraised homes higher for no reason) property taxes would rise and the prices that people would be willing to pay would drop.
Perry Wants a Bubble
Add it all up and Perry is complaining that Black neighborhoods are not in the same housing bubble as white neighborhoods.
But if investors actually believed housing in a neighborhood was underpriced, they would swoop in, buy houses, fix them up and resell them for a profit or rent them out.
News for Perry
If homes are not selling it is because they are overpriced, not underpriced.
Alleged appraised value and black appraisers cannot change that simple fact.
Mish
A market-based economy functions best when capital is allocated efficiently. Developers, lenders, investors, buyers, sellers, etc. seek to earn the highest rate of return possible. Those that fail will not last long in a competitive marketplace. Appraisers merely measure the actions of these participants using one of several definitions of market value. Should we develop some other definition of value that would equalize some of the alleged bias? What is the responsibility of the GSE’s in this regard? Will they securitize loans based on valuations conducted to another definition of value? If the aim here is to eliminate discrimination it seems appraisers will be required to, in fact, discriminate when selecting market data.
When appraisers value a property under rent-control, we discriminate against current market rate sales or properties that are exempt. When we value affordable housing, we discriminate against market based sales. When we value tax advantaged properties (Mills Act, for example), we discriminate against properties taxed at market value. All of these involve pre-existing conditions that distort the market imposed by a governmental authority for a societal benefit (presumably). It would naturally follow then, that we will have to invoke a quota system in selecting market data under a new push to eliminate racial discrimination in appraisals. Moreover, we will have to overlook the fact that market participants themselves . . . discriminate.
The study is nothing but liberal confirmation bias with respect to the conclusion. This is another bleeding heart no win scenario (for whites). Houses in black neighborhoods are cheaper than market value because of racism…But then if whites all of a sudden start buying up houses in black neighborhoods, they’ll start screaming ‘gentrification’ and claim that whites are taking advantage of minorities and pushing them out because of..you guessed it..racism.
Very well said, imho.
Just like it’s easier to get published in climate research if you’re a climate alarmist rather than if you ask hard questions like some slightly skeptical scientists (like Judith Curry for one).
It’s getting easier to get published in economic research (and in many other disciplines, fwiw) if you’re an anti-racist activist, now. Everything now is “because racism,” and old white men can be blamed.
I am neither a racist nor a climate denier, but I can see how popular misconceptions , mostly perpetuated by social media, can begin to shape what should be honest scholarly research.
This is a REAL BAD THING for all of us, no matter how one might lean politically. When the truth gets run over in the interests of academic advancement and political sentiment in universities and think tanks…..we’re headed for the Dark Ages.
‘honest scholarly research’. Sure. Who paid for the ‘research’?
So..I think we all know now that if we read “research” that suggests smoking cigarettes is good for you, then you should look to see if RJ Reynolds is a corporate sponsor.
But….this new kind of perversion of science is different. When a scientific journal like Nature can publish an op ed by its editor that basically says that science itself is suspect because there isn’t enough racial equity, and that we must therefore promote more persons of color…actually make sure we graduate more black PhD’s and publish work by racial minorities…just because they are racial minorities….we’ve gone way off the rails.
It’s social justice in action…and social justice is essentially a very Marxist POV that would say it’s all about the power gradient….and nothing to do with scholarship.
That’s how you get bad science like the article Mish cited. It fits a narrative that is being promoted in academia…
One problem with having universities run by middle management….is that those people don’t know the difference between good science and bad science….no filters, no ability to discriminate.
I have nothing agains qualified black and brown scientists getting published….but the truth is that the people who are missing….the really smart back students…tend to figure out that medicine or tech is a better career path than academia, which is way oversupplied with PhD’s. of all colors and flavors. They self select out of it.
But we’re going to level that playing field, by God….even if the result is idiocracy.
If you increase the price of their principle asset without proportionally increasing their income then you are not doing them a service. All you are doing is increasing their property taxes thereby actually decreasing their income. Alternately you could have hedge funds buy the undervalued assets and then jack up rents. Since this income stream comes from poorer people you can lobby politicians to increase transfer payments to the poor allowing the hedge funds to capture that extra income as well. It’s the slum landlord trade that goes back ancient Rome and maybe back to Babylon.
So let me guess……..now they will taxes to the point of where they think the value should be at lol.
Paying for a place to live, be it owning or renting, is a cost of living just like food. We don’t cheer when food prices go up and we should not cheer when house prices go up.
How would we have gentrification without under-valued real estate?
People move in from other nearby tight markets, prices go up, old residents of the area complain about the changes, the rent gets “too damn high”, affordable housing is lost and the new people don’t know what was there before.
The problem is that there has to be a genuine, widespread and transracial “rising tide to lift all ships”.
If homes are not selling it is because they are overpriced, not underpriced.
It’s more complicated than that. There are other issues, such as crime, infrastructure like transportation, schools , access to goods and services. Without these no price will be a good price
I bought my first house in the ghetto for $800, as a student. Sold it for $1600 after a year and a few improvements. Big house, big kitchen, we lived there with 4 people, double free standing garage, large lot. Formerly well-to-do middle class neighborhood. Coming from Canada the house was a steal, about 1% of the price I expected, cheaper than renting, home-owner decades before expected.
There were a few drawbacks: Coming home at night and thinking something is different here today, finally it dawns that they bulldozed the house 3 lots over today and turned it into a sand lot. Or having to get the ladder out in the morning to board everything up again with plywood before leaving for class, only to have to kick the boarding out at night to be able to sleep in the heat.
I’m sure the best way to improve the lot of people in a neighborhood like this is higher mortgages and higher taxes. [An ignorance that could only be the fruit of reading many books.]
appraisers don’t set market prices but a bad appraisal can limit access to credit
Which is good. Credit inflates prices to way beyond what people can afford.
Andre M. Perry seems to forgot Bill Clinton used the Community Reinvestment Act to force banks to lend to under-served areas. Housing prices went up, the bubble popped, and people were wiped out financially. If anything, Mr. Perry should be calling for the repeal of the Community Reinvestment Act.
The President BILL Clinton used the Community Reinvestment Act to force banks to lend to communities where there were fewer deposits. The theory was the poorer communities would benefit. The result was a housing bubble that popped and caused many foreclosures.
So…I do have zero doubt that there are some underpriced homes in predominantly black and brown neighborhoods.
I’d like to identify some and buy them.
We call that a successful arbitrage…..when somebody who can see the future buys something and gets really excellent value because they understand that change is coming.
But here there aren’t any like that here anymore. That ship sailed years ago.
Corpus Christi is a different story. I keep telling people I see value in Corpus Christi, I get looks like I’m crazy. But you could find lots of properties there to gentrify….for a great price.
But there will always be neighborhoods in some places…lots of places, where the perception is that the ethnic neighborhoods are dangerous, have high crime….whether it’s true or not.
Nobody wants to hear gunfire in their neighborhood. Nobody wants to be held up or ripped off or be a victim of the knock-out game, which happened to my son when he was a student in Chicago.
buyers set prices, yes. but what buyers are able to pay is a combination of what the buyer earns and what the bank is willing to lend based on that income and the risk involved if they cannot be paid back.
When the disparity in prices are large enough, white people start moving in in a process called gentrification. People hate that too.
Perry claims that these homes are undervalued due to racism. For argument’s sake, let’s assume that’s true. Even so, people with racist attitudes will continue to participate in the housing market. Consequently, homes in black neighborhoods will continue to have relatively lower values. That seems like stating the obvious, but Perry seems to overlook it. His solutions do nothing to fix the underlying cause, if it is in fact the case.
Ironically, even if the prices of these homes could be increased with a magic wand or black appraisers, all this would do is price low-end buyers out of these houses and neighborhoods. Given wealth and income disparities across races, this would disproportionately impact African-Americans. As a result, these neighborhoods would become less black over time (a.k.a. gentrification). I am not familiar with Perry, but I would assume he views this as a negative. Increasing the attractiveness of “black” neighborhoods is invariably a double-edged sword for those who want to keep them “black”.
Let me see if I’ve got this right. Blacks are able to buy houses for prices below the “real value.”
That’s a problem? I thought it was a lack of affordable housing that was the problem?
Why not the time-honored real estate investment move of trading up? No capital gains tax for selling your house and making a profit as long as you live there 2 years out of the last 5. Great deals in Chicago’s Lincoln Park, Wicker Park, Bucktown, North Center, Bucktown, Andersonville, Logan Square (current mayor lives there), Wrigleyville/Lakeview, Ravenswood (Rahm’s neighborhood, where The Tiny Dancer hid his wedding dress in a basement like something out of National Treasure), Old Town, Edgewater, and The Bryn Mawr Historic area. Great properties, schools, transportation, shopping, restaurants and entertainment.
Perry is arguing that black homeowners should pay higher real estate taxes to fund schools better. Why not let black homeowners use their “too low” taxes to supplement their kids’ education either via tutoring/extra classes or private and/or charter schools. I’d guess Perry started from his desired conclusion and worked backwards.
True that buyers set prices. But as I found out from trying to buy a Detroit house, if the appraisal is lower than the current, actual market price, you aren’t getting a mortgage. Something like 6,000 mortgages were written on Detroit houses, in a city of 600,000! Most are sold for cash because you cannot get a mortgage. These are beautiful mansions, not slum houses I am talking about
Another problem with Detroit is that lending institutions have a minimum mortgage amount.
That is a lending issue, not an appraisal issue. Banks can fix that and should but it might require higher fees to make the loan profitable.
For most of the country, the lending environment sets prices. If lenders get bailed out by dumping their loans to a second party who then inserts it into the maw of the Fed, then prices go up. This game has been played since the early 2000’s and is the main unstated reason for the social unrest.
And the main stated reason is the general downward path of mortgage interest rates.