Veros Real Estate Solutions (Veros), a provider of enterprise risk management and collateral valuation services, released new research that examined the potential for bias in home valuations generated by their VeroVALUE Automated Valuation Model (AVM) when analyzed across boundaries in historical redlining maps.
Veros’ study examined AVM predictions for single-family properties in redlined versus non-redlined neighborhoods close to one another in Los Angeles, California. Veros’ economists used this approach because mortgage funds were historically abundant for non-redlined areas, while they were scarce or non-existent for redlined areas. To enable proper testing, the areas selected for analysis had single-family homes on both sides of the boundaries.
Statistical multiple regression analysis was used to investigate which physical home attributes were responsible for the differences seen in the VeroVALUE AVM estimates. Of particular interest in this analysis was the role of a location variable (whether the residence was in a redlined area or not) as a determinant of housing prices.
“After controlling for the physical attributes of homes, the VeroVALUE AVM returned comparable estimates for properties on either side of the redline,” said Reena Agrawal, Veros’ Research Economist. “The research also found that a modern-day outcome of historical redlining is that homes in neighborhoods that were redlined generally have smaller lot sizes and living areas compared to homes in non-redlined areas, leading to lower median values than larger homes.” The homes valued lower on average in historically redlined areas are often the result of property characteristics such as smaller living areas and lot sizes, not due to a lingering bias due to historical redlining.
The study was designed to consider whether all valuation solutions are biased because of historical redlining, as some have suggested. AVMs offer a distinct benefit because they do not rely on any data related to historical redlining maps or demographic information concerning the parties involved in real estate transactions. However, there is the suggestion that any property valuation offering may be unwittingly influenced or biased through the injection of historically biased data rooted in decades-old discrimination.
“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,” said Eric Fox, Veros’ Chief Economist.
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