Jonathan Miller on challenges facing the appraisal industry

Today’s HousingWire Daily continues Houses in Motion, a miniseries that looks at real estate in the U.S., hosted by Senior Real Estate Reporter Matthew Blake. This episode features an interview with Jonathan Miller, President and CEO of Miller Samuel, a real estate appraisal and consulting firm that he co-founded in 1986.

Miller explains the ins and outs of the appraisal profession, challenges facing the appraisal industry, the appraiser as a veritable “lone wolf” and the graying of the industry. 

Additionally, he discusses the role of appraisal management companies and dives into the recent allegations of racial discrimination and bias against individual appraisers.

Here is a small preview of the interview, which has been lightly edited for length and clarity:

Matthew Blake: So, from your perspective, the appraisal management company can be demoralizing to the appraiser. And then we have other problems: the training program, the weak leadership, the feeling appraisers are twisting in the wind.

Given all that context, what can we make of bias charges against appraisers and this very serious claim that the Biden administration is looking into that there’s systemic racial bias, where appraisers are undervaluing homes of minority homebuilders. 

Jonathan Miller: Systemic racism isn’t unique to the appraisal industry. It’s everywhere. It’s part of our system. Our housing system as we know it was set up on racism. What neighborhoods were good neighborhoods, what neighborhoods were bad neighborhoods. It’s all online, you can find it easily. It’s a credibility leap to say appraisers are making minority neighborhoods less valued. 

HousingWire Daily examines the most compelling articles reported across HW Media. Each afternoon, we provide our listeners with a deeper look into the stories coming across our newsroom that are helping Move Markets Forward. Hosted by Matthew Blake and produced by Alcynna Lloyd and Elissa Branch.

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Matthew Blake: Hello, and welcome to “Houses in Motion,” Housing Wire Daily’s weekly look at the U.S. real estate market. For our second episode I’m tackling an important subject that is, well, real estate-adjacent, I would say. And that’s the life and times of the appraiser. Appraisers have made national headlines the past year for the wrong reasons. Stories in The New York Times and Chicago Public Radio reported instances of racial discrimination in how appraisers value homes. What do those incriminating stories suggest about the appraiser profession as a whole?

We seek answers by talking to Jonathan Miller. For 35 years, Jonathan has been a real estate appraiser himself with Miller Samuel, valuing homes in Connecticut and New York. He’s also one of the most respected voices in appraisal, and for that matter, providing information about the real estate market. In my time as a real estate reporter I’ve come to rely on Jonathan, not just for the monthly market reports his firm publishes but in ability to place those numbers in a historic context. Jonathan is one of my most enjoyable and illuminating sources to talk to and I hope that after this conversation you’ll see what I mean.

Jonathan, why don’t you talk a little bit about yourself and kind of explain what an appraiser is?

Jonathan Miller: Sure. Like you said, I’m a real estate appraiser. My company is called Miller Samuel. We’ve been in business since 1986 so I’m ancient and I think that reflects the industry. Our industry, appraisers are aging out, although we have people in our company far younger than me. I’m the oldest by far. But, you know, that’s one of the things that is concerning about the industry is the ability to track new talent, you know, younger talent into the industry and it’s been…the last decade or so there’s been a lot of turmoil.

When we think about what an appraiser does, we provide value opinions on property as of certain moments in time. So, you know, I think the most commonly understood use of an appraiser’s services is in a mortgage where someone’s buying a property or refinancing a property they own and a lender has the appraiser go out and come up with a value and then the lender makes an underwriting decision based on that valuation. It may or may not agree with the purchase price or may or may not agree with what the borrower thinks their home is worth. As we know, home values are wildly personal to many, including myself. And so, you know, that gets complicated.

In a perfect world the appraiser should be able to operate independently without pressure to, you know, sort of “hit a number” which was the default world that many appraisers found themselves in during the financial crisis, the housing bubble where, you know, a borrower just had to have a pulse or fog a mirror to get a mortgage. I had an appraiser colleague of mine tell me a long time ago, he said during that era, “Everybody’s smarter than you. Everybody knows the number already.” You know, the buyer, the seller, the mortgage broker that’s going to get a commission, the brokers that are going to get a commission. Everybody knows the number and you’re last to the party and you can be very disruptive. You know, so the industry is pretty challenging in that regard and, unfortunately, and we can get into it but unfortunately, the industry and on the ground appraisers are often left twisting in the wind when the people that are going after them don’t even understand what we do.

Matthew Blake: Yeah. Thanks. That provides a lot of great historic context. I mean, a few things to hit on from that. I mean, one thing that you started off with is sort of saying, you know, the profession is old. The Appraisal Institute, the trade group, they say 61 years old is the average age of an appraiser. I believe…I’m saying this off the top of my head, but I think 85% are white, maybe even more than that. It’s over 75% are male. Why do you think that the appraisal industry is, A, not reflective of sort of the labor force in the U.S. as a whole and, B, has had trouble recruiting younger people?

Jonathan Miller: Sure. Well, I think they go together, those two questions, because one leads to the other and I’ll lay it out. And in fact, those percentages, 85 or whatever the number was, that was for the Appraisal Institute. If you look at the Bureau of Labor Statistics, BLS, where they track 400 occupations in the U.S., the percentage of white appraisers is 96.5%. We are dead last as an industry and, believe it or not, farmers and ranchers are more diverse than real estate appraisers. And that’s not the fault of real estate appraisers.

That’s the fault of how do you get into the profession. You know, what’s the entry, how does that work, how does licensing work? So unlike accountants and lawyers and other professional practices, the way appraising works, to get into the profession is it almost is a who-you-know industry where you get a job working for a relative or a friend and then you have to spend two years accumulating experience so that you can get your license or your certification. And the problem with that structure is that for two years, you know, if an appraisal firm that you’re working for does mostly work for mortgages, purchases or refinances, for two years, you’re a cost burden on the appraisal firm because in banks, even though the GSEs, Fannie and Freddie, and perfectly fine with trainees or, you know, which has sort of become a derogatory term, but an apprentice would be a better term to describe somebody that has less than two years’ experience, you know, perhaps taken all the coursework that’s required but they can’t sign off on a report by themselves with most lenders.

Most banks since the financial crisis have lost muscle memory to the way it was pre-financial, you know, housing bubble when, you know, if you had an experienced appraiser, say the principal of that firm, sign off on the report. But now, most lenders, you know, require the reviewer, the supervisor…you know, there’s usually two signatures on a report, to actually physically inspect the interior of the property as well. So you can imagine that means a senior person can’t really do their own appraising because they’re going to be running around with someone for two years to get them trained or to get enough experience.

A lot of this stems from, you know, if you really focus on the challenge, the problem is really on leadership in the industry. It’s not so much… You know, when you think of appraisers, appraisers, as I’ve always said in my blog and just in public, you know, we’re lone wolves for the most part. Our industry is comprised of solo practitioners…

Matthew Blake: There’s no type of like a union or guild or anything like that?

Jonathan Miller: There is one but it’s called AGA, but it’s not a dominate, in terms of membership. I think in terms of the bigger membership is seen in the trade groups, and, you know, the biggest one is called the Appraisal Institute. But they’re a trade group, you know, and their mission is to, you know, enhance the profession to help their members. But as I’ve pointed out in many of my writings, the two biggest organizations that lead our industry, the Appraisal Foundation, which manages USPAP, which is our Uniform Standards of Professional Appraisal Practice, the things we need to do to maintain our license or certification, they’re in charge of that and so that’s very important. And then the other is the Appraisal Institute which, you know, from a branding and a professionalism, you know, they’re representing their members to the public.

The problem is that both of these organizations for decades have been mired in their own sort of self-dealing in corruption or however you want to call it and there’s very little focus on appraisers. And not only that, commercial appraisers in the Appraisal Institute are kind of all that matter. And so residential appraisers, like I have a general license or certification, which means I’m commercial and residential, but a residential-certified appraiser, you know, someone that appraises residential properties for a living aren’t really, they’re sort of persona non grata with this big trade group and the Appraisal Institute, and it doesn’t have to be that way. It wasn’t that way when I was involved with it 10 or 15 years ago.

Matthew Blake: And before… Because I want to talk more about the leadership thing and sort of the idea of you as a lone wolf. But I think first for the audience we should just hit on a couple of things. One, which you’re about to talk about before I interrupted you, which is the bias thing. So there is, just to provide some context, a lot of people who have not dealt with an appraiser through the homebuying process. I’ve heard of an appraiser through stories in “The New York Times,” the “Washington Post,” National Public Radio, about individual instances of an appraiser goes into a home, they see pictures on the home of a Black family, they give the home a lower value than pictures of a white family adorning the fireplace. There are several of these sort of pretty outrageous-sounding individual instances, and we can talk about that in a second and get some of your thoughts on that.

The other kind of thing that we should hit on, I think, before we get into sort of the leadership thing is the appraisal management company and kind of what role did they play kind of as the middleman between the appraiser and lender and then maybe we can circle back into some of the leadership issues, which kind of are maybe why the problems we’re about to talk about are not being solved. But anyway…

Jonathan Miller: Right. Well, so before I get to that I’ll sort of feed into what you just said because it leads to the bias. The reason why we have this narrative about the industry, a bias narrative, is that after the financial crisis in May 1st of 2009 we had something called “The Home Valuation Code of Conduct,” which is HVCC, which is pronounced “havoc” because that’s what it brought to the industry because what it did is it enabled, you know, [inaudible 00:12:39] AMCs, or appraisal management companies, which are on paper make a lot of sense buy there’s a wide disparity on how some operate versus others. And essentially they’re an institutional middleman.

And so the way I think of it is if you were a movie star and you were hired to be in a picture and your agent that got you the gig, you know, might get 10%. In the appraisal world, they get 50% and so, you know, and they lobby very hard against any kind of disclosure of them being an admin fee. They want it sort of buried in the appraisal fee on the mortgage application. So for example, you know, making this up, the appraisal fee happens to be $500, you know, once 2009 hit, and by the way, HVCC, it’s sunsetted but it was rolled into Dodd-Frank and it’s embedded into institutional policy everywhere. And it enabled the institutional middleman which was AMCs, which was in theory a firewall. It was like a bank having its own, you know, firewall between the loan officers and the appraisers. So now you have an appraisal that you get $250 instead of $500.

And so the AMC industry, I remember at the time, proclaimed that they’ve seen no deterioration in quality and, you know, with fees being cut by 50%. And I thought to myself, “Wow, what a great thing.” Corporate America or like law firms could say to all their students coming out of college, “Hey, guess what? We’re going to cut, you know, the salaries we’re offering by 50%.” It’s a bizarre sort of thinking because you get what you pay for.

So I think what’s happened is in mentoring, a senior, you know, an appraiser that has a firm, you know, like I’d be a typical example. Well, if there’s fee compression and now my fee is 50% less than it was, well, guess what? It’s a lot harder to carry somebody for a couple years. You would pay them something but not what they would be if they were a certified appraiser. It’d be something less, usually less than what people could live on and now you’re compromised financially because you’re giving, for some unknown reason to me, somehow you’re paying the mortgage applicant, the borrower, is paying 50% of their fee…you know, it says “appraisal fee.” So here’s a $500 fee pre-AMC sort of pre-HVCC, could becoming, instead of $1,000, becoming $2,000. And not only that, but depending on the way the contracts are arranged between the banks and the AMCs, a lot of AMCs might take five or six days to find somebody to work for a lower fee than what the consensus is because they get to keep the difference.

So what we’re finding is the AMC process is actually more expensive for the consumer and it damages appraisal quality. It damages new entry into the profession and it is misrepresenting to the borrower.

Matthew Blake: So from your perspective, the appraisal management company pretty much demoralizing the appraiser and then we have all the other problems that you mentioned at the start, including, you know, the training program, including weak leadership, which we can return to in a second. So with all of this, I mean, I think you mentioned earlier the phrase you used was “twisting in the wind,” the appraiser. So all of that, the climate, I mean, like I’m a journalist, it’s not a very easy profession but it sounds very easy after what I’ve heard about an appraiser. So given, I guess, all this context that we now have about an appraiser, what can we now make of these bias charges and this sort of very serious claim which the Biden administration is looking into that there is systemic racial bias where appraisers are undervaluing the homes of minority homeowners?

Jonathan Miller: Right. Systemic racism isn’t unique to the appraisal industry. In my view, it’s everywhere. It’s part of our system. The housing system as we know it, Fannie Mae was sped up on racism, you know, what neighborhoods were good neighborhoods, what neighborhoods were bad neighborhoods. There were maps. It’s all online. You can find it easily.

So the housing was systemically racist from the beginning of sort of organized secondary markets, all that sort of thing. Not only that, housing as a concept, I mean, I’m in the Northeastern United States and deed restrictions on, you know, restrictions on race or religion are, you know, very common until the ’60s and early ’70s. So the system itself has this residual legacy of systemic racism.

And then what you do is you have this sort of scenario, and I think a lot of this comes from there was a report from Brookings back in 2018 that is used as proof about and inferring that all appraisers are racist. And what’s amazing about this disconnect is that when you read the paper, it’s called a credibility leap. There’s no connection. They basically look at demographics and say, you know, all over the U.S., you know, neighborhoods that the racial composition is skewed towards minorities has lower housing values than those skewed for, you know, whites or, you know, non-minority populations and therefore, the appraisers are making those markets less expensive.

And then you throw in, you know, individual scenarios. I think there’s like four or five examples that are floating around and being repeated over and over again, you know, covered in a couple of TV stations in California covered it, “The New York Times” did a story. You know, and then it’s been regurgitated sort of, you know, in other outlets as well and it becomes like this sort of fact when in fact in the paper when you read it, they don’t understand what an appraiser actually does. I’m not saying there isn’t racism in valuation, that all appraisers are neutral. Just like any profession, I think that’s impossible to proclaim.

In fact, back in…I think it was 2019, all the leaders in the appraisal profession testified in front of Congress. They were all white male except for one female, and they all said there’s no racism in valuation. Well, there has to be. I mean, there’s no absolute here. There has to be and, you know, we don’t really know what it is, you know, how large it is, but I’m of the opinion it’s probably no different than society.

But the problem is that when an appraiser goes into a property, they are not making the value. They are observers of conditions that exist in the property. And if I’m appraising in a highly affluent area with 5,000 or 8,000 square foot McMansions, and the median price is $3 million, I’m not going to look at homes that are in the $500,000 price category. As an industry, we’re the observers. That’s what market is. You know, we’re trying to suss out what a reasonable price is. Anyway, that’s sort of the, you know, underlying flaw. And then the reason the twisting in the wind part is, so you have a Brookings report that comes out, fatally flawed in terms of not understanding what appraisers do. I’m not taking away from the idea that you have lower housing prices in some areas versus other areas. I mean, that’s fact.

Matthew Blake: It’s gotten worse since red-lining, I would add.

Jonathan Miller: Right, right, exactly. We have lenders, you know, they were red-lining laws that anti-red-lining now, you know, that you have to be very careful of… There’s’ all that sort of thing. But, you know, there’s still these issues appear. “Newsday” did a big story on Long Island about the real estate brokerage industry and there were, you know, examples of, you know, steering to different neighborhoods and all that sort of thing. So that sort of stuff exists. But the act of valuation is not the reason for, you know, an affluent area of Chicago to be worth more. That’s not the appraiser saying, “Hey, let me hit the number. Make it lower.” They’re using sales nearby. So, you know, the methodology of what market value is, that is what lenders lend on, right? They lend on market value. The don’t lend, generally, on cost. They really look at that.

And then one other point I’ll make is you can see this can be a five-hour discussion.

Matthew Blake: It can.

Jonathan Miller: What’s really interesting about the lack of understanding about what an appraiser does in the narrative is that price appreciation largely comes from the value of the land. So an empty lot in a poor neighborhood versus an empty lot in an affluent area don’t have pictures of the residents on the wall and they still come in lower. Like it’s sort of like this weird explanation where we have examples of, you know, biased or prejudiced behavior which, you know, project this narrative. We have a study that doesn’t understand what we do and makes a credibility leap between, you know, housing prices in low-priced areas and it’s a hop, skip, and a jump to say, “Well, appraisers are lowering the value…” Basically keeping the values down. It means they don’t understand what we do.

Therefore, problems with the Appraisal Institute in leadership, the whiteness of the appraisal industry rests almost entirely on the Appraisal Foundation, which monitors our standards. And I can just say that in 30 years of its existence, for the first time, one of its boards under pressure from people like me and a band of other like-minded people succumb to pressure and actually have an African-American on a technical board, which hadn’t happened in 30 years. And that technical board determines qualifications to become an appraiser, so you can see, like, the problem. The problem is coming from the top. The problem isn’t specific to appraising on the ground level.

Matthew Blake: Now, that makes a lot of sense. I think just to give our listeners some context, I think that was Andre Perry who did the Brookings study and then Elizabeth Korver-Glenn and Junia Howell, they’re two sociologists, I believe, University of New Mexico, University of Pittsburgh, they did a similar study which I found personally to be a little more of a bust than the Brookings study and they were basically looking at the valuation of homes since basically after 1977 when red-lining was okay, completely and totally officially outlawed by the federal government. And they basically found that, like, in white neighborhoods, you know, the valuation of homes, predominantly white neighborhoods, obviously you have to have a defined white neighborhoods in their methodology can be a question. But basically in white neighborhoods, the value of homes has gone up. In Black neighborhoods, adjusted for inflation, the value has gone down and I think that correlation is not causation. You know, this is not the fault of the solitary appraiser. This is the fault, as you say, of the housing industry writ large and you get into sort of the futility of reform with the Appraisal Foundation, with the Appraisal Institute.

I guess like I would want to like leave this discussion kind of asking you what kind of agency do individual appraisers and the appraisal profession have to sort of correct what seems to be a growing gap in valuation? Like is there something, and again, like you say, this can be a five-hour conversation. But is there something you see in appraisal methodology, whether it’s this sort of focus on like comparable homes or like a home in Watts in LA that’s identical to a home in Pasadena is like somehow a third of the value of a home in Pasadena? Like is there something flawed with that? Is there something flawed in sort of the standards that the Appraisal Foundation has concocted? Is there something flawed with the appraiser being pressured by the AMC? What can appraisers do to at least in some small level of justice?

Jonathan Miller: Right. So that’s an important question. You really sort of wrapped it all up together in a nice bow in terms of what the challenges and the issues are. And we’re particularly vulnerable as an industry because we really are on our own, the way I look at it. And so…

Matthew Blake: You have like no lobby, no like NAR, National Association of Realtors.

Jonathan Miller: That’s what the Appraisal Institute’s supposed to be. It doesn’t mean that they don’t lobby. It just means that they’re ineffective. And part of it’s not their fault. We’re tiny as an industry. NAR has, I think, 1.4 million, 1.5 million members right now. Just actual credentialed appraisers in the U.S. is like 77,000, and that’s including people that might… I mean, like I have a license in two states. I have two credentials.

Matthew Blake: So you would count twice.

Jonathan Miller: So I could be counted twice, you know. So the problem is we’re tiny but yet we’re also…you know, we go from the housing bubble where appraisers are sort of economically manipulated or you go out of business. And many appraisers have kids, a mortgage, and so you start doing some soul-searching about whether you get an assignment from a lender during the housing bubble because they give it to the “good appraisers,” the ones that would make the numbers and guess what? Those people are all gone now, which is kind of interesting. And then you have periods like now where, you know, the market’s moving so quickly and appraisers are struggling just to keep up with the volume. You know, appraisers are really challenged and one of the challenges has been keeping up with the market just because the market has been rising so quickly, although we’re starting to see some signs of activity starting to cool.

So the only thing I can say, like my approach has been, you know, be the loudest person in the room, you know, speak out. There’s a handful of people that work with me and just imagine if there were a lot more that could reach out. We’re really on our own until there’s a leadership turnover at both the Appraisal Institute and the Appraisal Foundation and both of those, you know, situations are in flux right now. Like that could actually happen within the next few years or sooner. It depends but everything takes time. It takes a year, it takes, you know, two years. The whole thing, it’s just a mess. And I think we still have a couple of years to sort this out. And I can assure you I’m gonna be very outspoken about it.

Matthew Blake: Yeah. Well, thank you very much and this was a very good conversation on a difficult subject to talk about and I really appreciate your time, Jonathan.

Jonathan Miller: My pleasure.

Matthew Blake: Yeah. Before we go, again, this is “Housing Wire Daily: Houses in Motion” and, yeah, do you want to maybe… You alluded to sort of the writing and work you do at times. So where can folks read you and follow you?

Jonathan Miller: I promise it’s easy, once you subscribe, to unsubscribe if I’m annoying because I publish a newsletter called “Housing Notes.” Got a pretty wide following. And you can get that, sign up at millersamuel.com, which is the homepage of my appraisal company Miller Samuel, and that comes out at 2 p.m. every Friday and we publish lots of market research and lots of articles about housing. But we also have a section there which I call “Appraiserville” and it’s really been an outlet for me to convey documents and actions of the parties that we’ve been talking about to give you links to view access to information so you can read in real-time, essentially, what is happening. And it’s free.

Matthew Blake: Yeah, it’s free. I read it every Friday. It’s very helpful for my work, so subscribe. You can easily unsubscribe it sounds like. Yeah, thanks so much again and this has been Housing Wire Daily. I’ll talk to you next week.

Jonathan Miller: Sounds great.

HousingWire Daily

Hosted by the journalists behind the headlines, HousingWire Daily examines the most compelling mortgage, real estate, and fintech articles reported from the HousingWire newsroom.

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