The Pattern of Appraisal Bias in the Third District During the Housing Crisis

This study provides an empirical examination of the pattern of appraisal bias during the housing crisis in the Third Federal Reserve District. After the nation experienced the worst housing crisis since the Great Depression, home valuation became more widely underestimated. In 9.2 percent of the cases, the appraisals in the Third District were below the contract prices from 2007 to 2011, and the share of low appraisals peaked during the mid-2009 to mid-2010 period. Factors that help explain the incidence of low appraisals include measures of market inefficiency such as the concentration of foreclosures and a lack of prior mortgage-financed purchases, contract prices, property types, appraiser types, and tightened regulations. Low appraisals are also found to create challenges for many borrowers in troubled neighborhoods and make mortgages more difficult to obtain