Phoenix area radio station KTAR picked up a story out of Washington alleging racial bias in the upkeep and sale of foreclosed homes around the country. According to the story, a public advocacy group fighting against fair housing discrimination claims banks are not putting the same effort into maintaining and selling foreclosed homes in minority neighborhoods as they are in white neighborhoods.

The National Fair Housing Alliance (NFHA) looked at foreclosed homes in nine different markets with a heavy focus on the Phoenix area because of the large number of distressed properties there. According to the organization their observations revealed “troubling disparities in maintenance and marketing practices” among houses located in predominantly black and Hispanic neighborhoods. The group alleges houses are not being maintained and are frequently found with broken windows, unkempt yards, and no “for sale” signs. As you’d expect, banks disagree with the assessment.

“Banks operate and are examined under fair-lending and fair-housing laws to ensure equal treatment across all communities,” said Bob Davis of the American Bankers Association. “Banks take care of these houses to preserve their collateral regardless of where the property is located.”

NFHA CEO Shanna Smith countered bank claims with a warning, stating “if people want to get into lengthy litigation, we’ll certainly have the resources to do that.” She said her organization plans to file racial discrimination complaints with HUD against a number of lenders they have deemed guilty.

Confusing Cause and Effect

The unfortunate result of the “investigation” by the NFHA is the automatic association made between property condition and racial bias. Just because houses in black and Hispanic neighborhoods are in poor condition does not justify the allegations made against banks. In fact, when you consider that banking is a business in which owners and shareholders are trying to make money, it simply makes no logical sense for banks to purposely reduce the value of the homes they’re trying to sell based on the skin color of neighborhood residents.

In reality what NFHA is observing is the normal course of the real estate market based on current economic conditions. Banks must use their financial resources in order to get the highest return on all of their properties. So they can sink tons of money into homes located in depressed neighborhoods only to find they will never get that money back when it comes time to sell. By the same token, foreclosed homes in more economically viable neighborhoods will bring a better return on the dollar.

Furthermore, NFHA never explains what condition these neglected homes were in when they were foreclosed on. Could it be that they were in worse shape because their previous owners also neglected them?

One of the most well known truths of the real estate market is that property values are heavily affected by other similar properties in a given community. A more fair assessment for the NFHA would have been to compare the foreclosed homes to all the other homes in the neighborhood before making accusations. If they found that these neighborhoods were all well maintained and had property values at or above the median they would have legitimate cause for concern. But if all they are doing is looking at houses from the curb before charging racial bias, they are way out of line.