Redlining in Real Estate: Impact on Property Values

By Saleem Mubarak

HOUSTON, TX–Worried about redlining? Don’t lose sleep over it–lenders can’t judge you by your ZIP code. What really matters is your credit, income, and the market.

Real estate investors are keen to get the lowdown on the consequences of buying in areas where the zip code is redlining by mortgage lenders.

Aims Wireless asked David Smith, an experienced real estate professional in Houston, whether buyers in these areas face higher interest rates or stricter lending requirements. He flatly said no, that’s not the case.

He explained that Under the Fair Housing Act and Equal Credit Opportunity Act, lenders cannot base loan terms on neighborhood demographics or ZIP codes. Interest rates and loan requirements are determined by the buyer’s creditworthiness, income, debt-to-income ratio, and the property itself, he added. 

“If a lender goes against these rules, it would be crossing the line and must be reported; it’s not standard lending practice,” he emphasized.

How Redlining Can Affect Resale and Appreciation 

Talking about the impact of redlining on the ability to resell a home later, he said that if redlining were actively occurring, it could “shrink the buyer pool” because some buyers might have difficulty obtaining financing.

He said that could impact appreciation and resale value. But since redlining is illegal, what we really look at in practice are the neighborhood’s current market trends, demand, and investment fundamentals. Those are the factors that drive resale potential, he claimed.

How Buyers Can Protect Themselves Financially

When asked the ways buyers can protect themselves financially if they purchase in such areas, David Smith said that the best protections are the same as with any purchase: buy with solid “non-bias” comparable sales. He said they need to make sure the property is priced in line with the market, and focus on areas with stable or growing demand.

“A good home inspection, a realistic resale projection, and financing terms that are sustainable for the buyer also mitigate risk. If there are concerns about lending patterns, documenting them and consulting with your local housing authority or legal council is another safeguard,” he noted.

The Role of Real Estate Professionals

He said that Real Estate professionals “Realtors” absolutely have a responsibility to remain “neutral” and compliant.

Steering clients away from or toward specific neighborhoods based on demographics would be a Fair Housing violation. He said that good and ethical real estate professionals can and should provide “factual, objective” market data. This includes pricing trends, comps, days on market, home & neighborhood amenities, schools, and past trending appreciation rates. They should then let clients make a sound decision that is right for them, he noted.

“As a real estate professional, our role is to equip, not to influence them based on prohibited factors. I always show all raw data to my clients, and then help them interpret and understand the current market. Ultimately, it is up to my clients to make the final determination regarding what they are comfortable with,” he said.

Long-Term Impact of Redlining on Property Values

He responded to another question: How does redlining affect property values in those ZIP codes over time? He explained that while redlining in an area doesn’t directly harm anyone on the face, it can put a dent in the prospects of people living in those neighborhoods. Redlining limits the pool of buyers, and that’s really what happens, he added.

He said that limiting the number of buyers can directly influence property values. Some people believe that lenders simply refuse to lend in certain areas. While I don’t have full context, this may be due to other factors, not necessarily redlining. For example, insurance carriers might pull out of neighborhoods they consider high risk or high liability.

The downside of this scenario is that restricting buyers reduces the number of people able to purchase in that area. If someone can’t qualify for a property—for instance, an FHA loan—that removes a significant portion of potential buyers, which directly affects prices.

He said that over time, redlining can impact property values by reducing demand. When demand is low, prices are naturally impacted and may decline. Therefore, buyers in these areas could face challenges–not because of any law or policy, but due to the limited pool of qualified buyers, he mentioned.