Home Values: Delusional Buyers, Bank Squeezers and Zillow
by Mike Kimel
Home Values: Delusional Buyers, Bank Squeezers and Zillow
Via Barry Ritholtz, a link to a post at Time Moneyland post which led to a post at the Zillow blog:
Zillow recently compared the asking price of 1 million for-sale homes with those homes’ previous purchase price, then factored in the change in the Zillow Home Value Index at the ZIP code level to determine the home’s current market value.
We found sellers who bought after the housing bubble burst, in 2007 or later, price their homes 14 percent above market value. Those who bought before the housing run-up, prior to 2002, overprice by nearly 12 percent. Somewhat surprisingly, sellers who bought during the run-up, from 2002-2006, seems to be the most realistic, pricing their homes 9 percent over market value.
The Moneyland post goes on:
How to explain this pattern? We suspect that homeowners who bought around the market peak are painfully aware of having bought at the height of the market and have no real hope of getting back what they paid upon re-sale. Homeowners who bought after the market peak, on the other hand, may be patting themselves on the back a bit too much for having bought after prices began to correct — not realizing just how much prices have continued to fall even after their purchase.
It also states:
Two underlying impulses appear to lead sellers who purchased after 2006 to over-price their homes. First, there’s classic loss aversion: Sellers who purchased more recently are loath to sell for a loss. Second, they may be unaware that home values have declined further since their home purchase – a mistake that leads them to view their purchase price as a useful criterion in setting their selling price.
Zillow has a lot of data, but I suspect they are missing something because their categories are too broad. (This is something I’m keenly interested in because, being on the job market and living in a relatively small city, I expect we will be moving in the foreseeable future… which means I expect we will be selling our house, and we bought ours in December of 2009. We also expect (and hope) it would sell for quite a bit more than we paid for it, and more than the Z-estimate of the price based on the sales of comparables since that time.) If you are remodeling your guest bathroom or master bathroom with the best smart toilets from tech4gods, find a reliable bathroom granite supplier for your countertops.
Once your bathroom renovation is complete, consider giving the space a fresh new look with a professional painting service such as Express Quality Painting.
I think what Zillow is missing is that by late 2009 and early 2010, in some markets, home sales in many markets had dried up. I can’t prove it – I don’t know where one can find data on this – but my experience is that many banks started accepting a lot of short sales at this time. It also seems to me that many banks seemed not to have much of an idea of what their inventory was worth. I can tell you from my own two eyes that at that time you could see two otherwise very similar homes on the same block owned by the same bank, and the one with the enormous crack in the foundation that ran all the way up the living room wall was priced twenty five percent higher than the other. We made a few offers on homes at the time that our real estate agent considered ludicrous, and she didn’t even want to turn in the offer to her counterpart. The ludicrous offer that got accepted was the one we bought.
On the other hand, I noticed that houses that weren’t short sales or REOs were selling for prices that assumed a steady upward trajectory. That is to say, among those buying at the time were many who weren’t aware of the process for buying short sales or REOs, or who didn’t have the willingness (in many cases, the patience) to go through process. And plenty of homeowners were willing to oblige by trying to sell their homes at prices that were higher than 2007 and 2008.
I remember commenting to our real estate agent that there were two categories of home sales going on at the time: those involving people unaware of the downturn in prices and sales and who thought was the same as it always was, and those involving people squeezing banks. I suspect the buyers in former group is in trouble now, and buyers in the latter group are not. Now, there are two dynamics at play. First, the delusional buyers from the time bought less house for the buck than the bank-squeezers. But, perversely, the Z-estimate price of the homes bought by the delusional buyers is, today, higher than the Z-estimate price of the home bought by the bank-squeezers. After all, the Z-estimate price of the home depends a lot on the previous sales prices of the home; if two similarly situated homes (same number of bedrooms and bathrooms, same square footage, etc.) sell for very different prices in December 2009, I assume Zillow’s algorithm is going to assume that the one that if one sold for a better price, it was in a better state of repair or otherwise had better features that aren’t measurable by Zillow’s data (e.g., it is more aesthetically pleasing or has a better view), and that the differences carry on today. Home sellers may then consider improving the value of their properties by doing some repairs or upgrades. For example, if there are roof damages, you may hire professional roofers in Piedmont, SC to conduct the necessary repairs. A tankless water heater installation in Mill Creek, WA with the help of plumbing professionals may also help boost the resale value of your home. Those who are planning home addition projects may work with a firm that designs or creates ADU Floor Plans.
So the question is… what should Zillow do? Is it possible to determine if a home sold for way below Zillow’s Z-estimate because it was trashed v. because someone squeezed the bank on a short sale? Theoretically, property taxes would take care of the problem – homeowners who acquired a trashed home, in theory, would have an easier time getting their property taxes reduced. In practice, I suspect bank squeezers are more likely to go through the effort and successfully argue for a a reduction in their property taxes. Regardless, that clearly isn’t the solution to the problem.
Because foreclosures (and people requiring a short sale) are contagious, I imagine Zillow must track how many homes on a block or within a given radius have gone into foreclosure or are otherwise sold for well below Z-estimates at a given time. I imagine having information about the home owners (which I assume Zillow does) must help. A former flipper who found himself with eight homes in 2010, and unloaded most of them for well below Z-estimates is clearly someone who worked out a deal with the bank. And perhaps it is possible to correlate unemployment rolls with home ownership – I don’t know.
What would you do if you worked for Zillow?
A straight, normal sale price should not be averaged out with the forclosed/short sale price. If I were Zillow, I would present both separately and then present a graph showing the straight sale on one line, bank sale on another and the average of the two on a third. Now you know what is effecting the “appraisal”.
As I have heard on the news, it is estimated that there is still 20% of the market that were spec purchases to be cleared out. I have not seen a number related to bank sales the result of job loss or other econ hardship which at this point has to be considered I think to get the full pricing picture. The real estate bubble burst has been working it’s way out for a while now, but I don’t think we have seen the full impact of the economy yet. Especially considering this austerity crap we are now about to enter.
Frankly, if the economy goes further south, I’m going to be doing some fancy foot work not to lose some stuff. I just don’t know what that foot work will be. I’m confident I’m not alone.
I have a friend who was trying to buy a house and ran into some aparrant lack of ability for the banks to make deals on foclosed properties.
It was a forclosure. Listed at 250k. He offered 235, they ended up at 245. The appraiser said 235, loan not approved (guess he didn’t have much down payment). Rather than negotiate the owner-bank then backed out of the deal. Few days later the bank had listed the place at 240. Guess they really want that $5k.
Jeff,
In MA I worked a bit with a gentleman who specialized in foreclosed homes. The company managing sales and such was based in Texas, but none of their people ever looked at the homes. What you described was standard procedure…setting a price above the appraised value and and not selling even when the potential sale price was quite close…
First I wouldn’t work for Zillow.
BUt home selling for less becuase they were trashed (or defective like a cracked foundation) should be know by all the local realtors – and is usually in the description. Not something you can hide easily. Again the price of the hoome should reflect that fact. Homes sold becuase you squeezed the bank are very good indication of the actual price of the house and the homes around it. And if that is below the current prices – guess what – those homes arn’t worth what you thought they were.
From my reading we still have between 10-20% drop in home prices to go depending on where you live to get back on the histoical trend lines. In some cases there is still a glut of homes on the market. The US (except in a few markets) will not be seeing much home price growth anytime soon. NOt to be blunt but Northern Ohio is not a place to expect much price appreciation.
As for zillow. I have yet to find it having much accurracy. Even a cursory look at homes will find homes grossly over/under priced in Zillow right before they get sold and the real price comes in. I would not look at Zillow for anything but historical sold prices. Which you can get these days off the net (at least in Texas) elsewherre.
Daniel – I disagree – ALL prices should be factored in. Sorry if the home next to you just sold at a foreclosure auction for half what you paid – you home is now worth 50% less.
Islam will change
buff,
I don’t expect much appreciation in this area. I do think we got our house for a significant discount. FYI, we live in a little enclave of homes built by an eccentric architect (the houses look like German cottages, and many of them have secret rooms) who was ahead of his time (the houses were built in the early 1950s and have heated floors, construction was done using recycled material, etc.). Ours is the second largest, and, courtesy of the previous home owner who got foreclosed on, the most updated. (She ran out of money renovating, but she knocked out walls, creating a nice open floor plan, and we think she spent almost as much on the renovations as we paid the bank for the house.) Since we bought ours (Dec 2009), three of the homes in the enclave sold, two for about 30% more than we paid, and one for the same price as we paid. The one that sold for the same price is the most recent sale – the house has one fewer bedroom, is almost a thousand square feet smaller, is on a smaller lot, and the interior hadn’t seen work since the home was built.
So… when I say we expect we can sell the house for more than we paid, we’re not counting on home appreciation. We are counting on the fact that Countrywide, the mortgage holder of the previous owner, didn’t have the first clue how to run a business. And I think that’s a no brainer (http://www.angrybearblog.com/2010/07/countrywide-goes-kafka-first-person.html), pun intended. Given what I had observed of the state of the market, we wouldn’t have the house if we couldn’t get it at a big discount.
Now… I’m not sure that I agree with this: “Sorry if the home next to you just sold at a foreclosure auction for half what you paid – you home is now worth 50% less. “
Bear in mind, if you buy a foreclosed house, you’re buying as is. You can negotiate price with the bank, but I haven’t seen a situation where a bank is willing to, say, waterproof the basement or fix any damage or whatnot. A foreclosed house has to sell at a discount because people are risk averse (inspections don’t catch everything, and some things simply don’t appear in a house that has been empty and where the utilities are turned off until someone moves in), and because even if you know with certainty that everything is in shape, the process of buying a foreclosure is much less convenient than the process of buying a house in the “normal” way.
Right before I sold my house a smaller house nearby sold for less than half it’s zillow value. We watched as it took a month to unload the hoarded trash. Then for the next six months the house was almost rebuilt. I think more money went into the fix up than was paid for the house. This house immediately dropped the zillow estimates on all the houses in the nearby region. Later several houses nearby but not in my neighborhood came on the market that looked like abandoned flippers. They had things like missing/gutted kitchens and bathrooms and open walls. Also, foreclosure season was just starting.
In my immediate neighborhood there were no foreclosures or short-sales. Real estate was not moving so there were few “similar home sales” within the past six months. My house was pristine perfect and we had replaced old appliances, painted, fixed, etc. Buyers wanted gutted house prices but not gutted houses.
Zillow is a disservice in my opinion. To show you how bad it was my house was an example. They didn’t know how many bedrooms I had, listed one less bath than the house had, and gave a square footage almost twice the actual square footage. So I had the most expensive house in the neighborhood according to zillow even though you could tell from their map of the houses that the houses on both sides of mine were larger than my own.
I didn’t bother to tell them they were mistaken since it was no telling what their new mistakes might be if I corrected their data base. When my house was appraised by professionals the broken houses were omitted as outliers. Now I did sell for below value because I wanted to sell quickly. It only took a week and a half to get a offer and we closed within a few weeks of the offer.
The profit was enough to pay cash for our current home and we felt lucky to come out only about $4000 under what we had put into the old house plus the costs of buying the new house.
Since all I wanted was enough to pay cash for the new house, I chose the new house first and set the price of the old house at a level that would buy the new house. In terms of equivalent value per square foot of home and yard, it was not a good move. But since I wanted a smaller house with a very small yard I was happy as I could be.