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Are the echoes of historical redlining rippling through the algorithms employed by automated valuation models, confounding their results to this day?
Not after controlling for physical attributes like a home’s square footage and lot size, according to a study by Veros Real Estate Solutions.
Veros — the primary architect and technology provider of Fannie Mae and Freddie Mac’s Uniform Collateral Data Portal — put the company’s VeroVALUE automated valuation model (AVM) to the test by looking at old maps produced by the Home Owners’ Loan Corporation (HOLC) in the 1930s.
The maps, which academics have concluded used racially biased assessments to grade perceived lender risk in more than 200 cities, have been preserved by the Mapping Inequality project, a collaboration between four universities.
“These grades were a tool for redlining: Making it difficult or impossible for people in certain areas to access mortgage financing and thus become homeowners,” academics who made the maps available online explain on the Mapping Inequality website. “Redlining directed both public and private capital to native-born white families and away from African American and immigrant families. As homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth inequalities that we still see today.”
Veros’ researchers used the Mapping Inequality project’s historical maps to identify four areas of Los Angeles where ethnically homogenous blue zones were adjacent to “hazardous” red zones classified by the HOLC as having “low homeownership rates, old housing structures, and an ‘undesirable population.’ ”
Veros’ economists Reena Agrawal and Eric Fox then analyzed the home-price estimates generated by the VeroVALUE AMV for all the single-family homes in a tightly defined area, typically two or three city blocks, on either side of the boundaries between the blue and red zones.
They concluded that even after nearly nine decades, homes located within historically redlined neighborhoods “typically have less square footage, smaller lot sizes, and higher variations in quality and condition compared to homes in non-redlined areas, leading to lower median property values.”
But after controlling for the physical attributes of homes, researchers were satisfied that the VeroVALUE AVM returned comparable estimates for properties on either side of the redline.
Veros’ researchers cautioned that their results might not apply to other cities and don’t prove that other AVMs won’t be tripped up by historical redlining.
“While the current study has analyzed redlined neighborhoods in Los Angeles, we believe it is important to continue studying other historically redlined neighborhoods in metros across the United States to validate that similar conclusions are obtained,” Agrawal and Fox concluded.
“This is because VeroVALUE is modeled to incorporate comparable properties in a radius around the target property and does not include any protected class variables or geographic boundaries related to HOLC maps.”
Even if the study proves the VeroVALUE AVM does not value homes differently based on their locations in the Los Angeles HOLC maps, “all AVMs are not created equally and, therefore, performance may vary for other AVMs,” Vero researchers warned.
“Based on the results of our analyses, we recommend that other AVM providers conduct similar research to help demonstrate whether their AVMs likewise do not have any algorithmic bias with respect to redlined areas or with respect to racial compositions of neighborhoods.”
Veros says a previous study demonstrated that its VeroVALUE AVM is free from bias in minority communities.
With federal regulators currently drafting quality control standards for AVMs that could require lenders to prove that their use of valuation models doesn’t violate fair lending laws, other AVM providers may very well follow suit.
“In an environment where housing finance stakeholders consider both accuracy and fairness across the entire valuation spectrum, our VeroVALUE AVM is a proven and invaluable tool to achieve both goals,” Fox said in a statement.
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Email Matt Carter