Abstract
We empirically examine the role of appraisal in the residential mortgage lending process—in particular, the incidence, consequences, and determinants of appraisal below contract purchase price. Using the Boston Federal Reserve Study data set, we find that, as expected, low appraised value significantly increases the probability of mortgage loan application rejection. We find no evidence that low appraised value is related to census tract racial composition, an important finding given the history of the appraisal industry; however, low appraised value is related to proxies for neighborhood quality. Moreover, properties securing adjustable rate mortgages, condominiums, and properties purchased by African American buyers show an increased probability of low appraisal, though the race effect result is highly sensitive to model specification.
Similar content being viewed by others
References
Abrams, Charles. (1955). Forbidden Neighbors. Port Washington, NY: Kennikat Press.
Becker, Gary. (1959). The Economics of Discrimination. Chicago: University of Chicago Press.
Benston, George. (1981). “Mortgage Redlining Research: A Review and Critical Analysis,” Journal of Bank Research 12, 8-23.
Bradford, Calvin. (1979). “Financing Home Ownership: The Federal Role in Neighborhood Decline,” Urban Affairs Quarterly 14, 79-92.
Browne, Lynn E., and Geoffrey Tootell. (1995). “Mortgage Lending in Boston: A Response to the Critics,” New England Economic Review (September–October), 53-78.
Campbell, Tim, and J. Detrich. (1983). “Determinants of Default on Insured Conventional Residential Mortgage Loans,” Journal of Finance 38, 1569-1581.
Cho, Man, and Isaac Megbolugbe. (1996). “An Empirical Analysis of Property Appraisal and Mortgage Redlining,” Journal of Real Estate Finance and Economics 13, 45-56.
Dane, Stephen. (1993). “A History of Mortgage Lending Discrimination in the United States,” Journal of Intergroup Relations 20, 16-28.
Daniels, C. (1975). “The Influence of Racial Segregation on Housing Prices,” Journal of Urban Economics 2, 105-122.
Dean, John. (1947). “Only Caucasian: A Study of Race Covenants,” Journal of Land and Public Utility Economics 23, 428-432.
Fix, Michael, and Raymond Struyk. (1993). Clear and Convincing Evidence. Washington, DC: Urban Institute.
Follain, James R., and Stephen Malpezzi. (1981). “Another Look at Racial Differences in Housing Prices,” Urban Studies 18, 195-206.
Foster, Charles, and Robert Van Order. (1984). “An Option-based Model of Mortgage Default,” Housing Finance Review 3, 351-372.
Gabriel, Stuart A. (1987). “Economic Effects of Racial Integration: An Analysis of Hedonic Housing Prices and the Willingness to Pay,” Journal of the American Real Estate and Urban Economics Association 15, 268-278.
Galster, George. (1987). “Residential Segregation and Interracial Economic Disparities,” Journal of Urban Economics 21, 22-44.
Gau, George, Tsong-Yue Lai, and Ko Wang. (1992). “Optimal Comparable Weighting in Real Property Valuation: An Extension,” Journal of the American Real Estate and urban Economics Association 20, 107-124.
Green, Richard K., and James Shilling. (1994). “Do Teaser Rate ARMS Make Owner-occupied Housing More Affordable?” Journal of Housing Economics 3, 263-282.
Greene, William. (1993). Econometric Analysis (2nd ed.). New York: Macmillan.
Haurin, D., P. Hendershott, and D. Kim. (1991). “Local House Price Indexes: 1982–1991,” Journal of the American Real Estate and Urban Economics Association 19, 451-472.
Horne, David K. (1994). “Evaluating the Role of Race in Mortgage Lending,” FDIC Banking Review 7, 1-13.
Horne, David K., and Eric Rosenblatt. (1996). “Property Appraisals and Moral Hazard.” Paper presented at the American Real Estate Society meeting.
Hoyt, Homer. (1933). One Hundred Years of Land Values in Chicago. Chicago: University of Chicago Press.
Jackson, Kenneth T. (1980). “Race, Ethnicity, and Real Estate Appraisal,” Journal of Urban History 6, 419-453.
Kain, John, and John Quigley. (1975). Housing Markets and Racial Discrimination: A Micro-economic Analysis. New York: National Bureau of Economic Research.
King, A. Thomas, and Peter Mieszkowski. (1973). “Racial Discrimination, Segregation, and the Price of Housing,” Journal of Political Economy 81, 590-606.
LaCour-Little, Michael. (1996). “Application of Reverse Regression to Boston Federal Reserve Data Refutes Claims of Discrimination,” Journal of Real Estate Research 11, 1-12.
Lang, William, and Leonard Nakamura. (1993). “A Model of Redlining,” Journal of Urban Economics 33, 223-234.
Lapham, Victoria. (1971). “Do Blacks Pay More for Housing?” Journal of Political Economy 79, 1244-1257.
Ling, David, and Susan Wachter. (1995). “The Impact of Neighborhood Risk Characteristics on Home Mortgage Underwriting.” Mimeo.
Maddala, G. S. (1983). Limited Dependent and Qualitative Variables in Econometrics. Cambridge: Cambridge University Press.
Meese, Richard, and Nancy Wallace. (1991). “Nonparametric Estimation of Dynamic Hedonic Price Models and the Construction of Residential Housing Prices Indices,” Journal of the American Real Estate and Urban Economics Association 19, 308-332.
Megbolugbe, Isaac, and James Carr. (1993). “Federal Reserve Bank of Boston Study on Mortgage Lending Revisited,” Journal of Housing Research 4, 305-313.
Munnell, Alicia, Lynne Browne, James McEneaney, and Geoffrey Tootell. (1996). “Mortgage Lending in Boston: Interpreting HMDA Data,” American Economic Review 86, 25-54.
Newberger, Harriet B. (1989). “Discrimination by a Profit-Maximizing Real Estate Broker in Response to White Prejudice,” Journal of Urban Economics 26, 1-19.
Olsen, Edgar O. (1974). “Do the Poor or the Black Pay More for Housing?” In G. von Furstenberg and Horowitz (eds.), Patterns of Racial Discrimination, Vol. 1: Housing. Lexington, MA: Lexington Books.
Pollakowski, Henry, M. Stegman, and W. Rohe. (1991). “Rates of Return on Housing of Low and Moderate Income Owners,” Journal of the American Real Estate and Urban Economics Association 19, 417-425.
Quan, Daniel, and John Quigley. (1991). “Price Formation and the Appraisal Function,” Journal of Real Estate Finance and Economics 4, 127-146.
Schnare, Ann. (1976). “Racial and Ethnic Price Differentials in Urban Housing Markets,” Urban Studies 13, 107-120.
Smith, Barton A. (1981). “A Study of Racial Discrimination in Housing.” In J. Vernon Henderson (ed.), Research in Urban Economics, Vol. 1. (pp. 131-199). Greenwich, CT: JAI Press.
Straszheim, Mahlon R. (1970). “Racial Discrimination in the Urban Housing Market.” In G. von Furstenberg and Horowitz (eds.), Patterns of Racial Discrimination, Vol. 1: Housing. Lexington, Lexington Books.
Straszheim, Mahlon R. (1975). An Econometric Model of the Urban Housing Market. New York: National Bureau of Economic Research.
Swire, Peter P. (1995). “The Persistent Problem of Lending Discrimination: A Law and Economics Analysis,” University of Texas Law Review (June), 787-862.
Thibodeau, Thomas. (1989). “Housing Price Indexes from the 1974–1983 SIMSA Annual Housing Surveys,” Journal of the American Real Estate and Urban Economics Association 17, 100-117.
Vandell, Kerry D., and Thomas Thibodeau. (1985). “Estimation of Mortgage Defaults Using Disaggregate Loan History Data,” Journal of the American Real Estate and Urban Economics Association 13, 292-316.
Vaughn, Garret A. (1975). “Some Recent Evidence of Urban Housing to Non-Whites from Neighborhoods Undergoing Racial Change,” Journal of Economics and Business 27, 248-253.
von Furstenberg, George J. (1969). “Default Risk on FHA Insured Home Mortgages as a Function of the Terms of Financing,” Journal of Finance 24, 447-459.
Wilson, Franklin. (1979). Residential Consumption, Economic Opportunity, and Race. New York: Academic Press.
Yezer, Anthony, Robert Phillips, and Robert Trost. (1994). “Bias in Estimation of Discrimination and Default in Mortgage Lending: The Effects of Simultaneity and Self Selection,” Journal of Real Estate Finance and Economics 9, 197-224.
Yinger, John. (1978). “Black-White Price Differentials,” Land Economics 54, 188-208.
Yinger, John. (1979). “Prejudice and Discrimination in the Urban Housing Market.” In P. Mieszkowski and M. Straszheim (eds.), Current Issues in Urban Economics. Baltimore: John Hopkins University Press.
Yinger, John. (1986). “Measuring Racial Discrimination with Fair Housing Audits: Caught in the Act,” American Economic Review 76, 881-893.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
LaCour-Little, M., Green, R.K. Are Minorities or Minority Neighborhoods More Likely to Get Low Appraisals?. The Journal of Real Estate Finance and Economics 16, 301–315 (1998). https://doi.org/10.1023/A:1007727716513
Issue Date:
DOI: https://doi.org/10.1023/A:1007727716513