Archive for the 'Housing Prices' Category

Zeflections on Zillow

Earlier this week we put up a story about Zillow’s view on the value of our home. It wasn’t the first time we’ve mentioned Zillow, and I’m sure it won’t be the last. Historically we’ve only brought up the site when we we’re frustrated or amused. This mention had an interesting result – Zillow found our article and weighed in directly, and helpfully (see the comments at the bottom). It caused some debate and reflection within the Bergquist household.

There are aspects of Zillow that I genuinely like, despite the periodic venting. For example, they do a better job than most at aggregating information about a property onto a single page. They also present the information in a reasonably clean layout that is accessible to users. I even like the idea of creating a valuation algorithm, though it’s obviously difficult get it right and can produce some weird results. Most impressively, they have done a fantastic job of building a consumer real estate website with a large user base, and we give them our ultimate vote of support by paying to advertise on the site.

As you have previously read, we have mixed feelings about the Zestimates. The main concern is that there is a conflict in how the Zestimate is used by Zillow.

My interpretation of Jay’s point in the comments of the previous post is that Zillow considers Zestimates to be infotainment. Here’s their official explanation of what a Zestimate is. They are not appraisals. They are a starting point. Buyers and homeowners should get additional information from local professionals.

This position reflects reality since the values in our area have a median error of 7.0% and are considered their highest quality estimates. It’s also the smart legal thing to do since it should protect them if a user ever tried to sue after relying exclusively on the Zestimate for a real estate deal.

Despite the company’s effort to disclose the accuracy of their Zestimates, and downplay their role in valuing a property, home buyers we have worked with have not received that message. Buyers LOVE the fact that they can pull up the site and find out how much a home is worth.

The Zestimate was the site’s original hook – it’s how Zillow drew in users and built itself into the empire that it is today. They have since added many excellent features, but the Zestimate continues to be front and center. Disclaimers are there if you look for them, but honestly, how many consumers click through to see behind the curtain?

When navigating via the map, the Zestimate is the user’s first impression of a home. You see the house icon with the color showing its status and the value underneath. Clicking through to the detail page, the Zestimate point estimate (versus the estimated value range) is right at the top, and directly under the asking price for homes that are for sale. People believe what they read on the internet and what they see is the Zestimate.

Because the Zestimate is so central to the Zillow brand, it has to be presented as reliable. Why would anyone use the site (versus a competitor’s real estate portal) if they believe the prominently featured value splashed all over the place was inaccurate?

At the same time they also have to present it as essentially “for entertainment purposes only” for both legal protection and since the algorithm isn’t all that accurate according to the published stats or the real life experience of real estate professionals working in the market every day.

It’s a catch-22 for Zillow. Yet their success shows that they have found a good balance. The site thrives despite questionable accuracy – the consumer has spoken, and they want to be entertained. It’s up to real estate agents to educate the subset of Zillow users who are tying to buy a home and believe Zestimates to be infallible truth.

Related Posts
Why Does Zillow Hate my House?
The Appraiser is Coming
Using Assessor Data to Bid
Just Plain Zilly
The Right Offer Price

2013 Predictions

We never made any official predictions for the 2012 real estate market. I’m stunned that we didn’t do it because it’s a fun thing to think about, and after analyzing the year-end data we always have thoughts and ideas. We won’t make that mistake again this year … here are our predictions for the coming year.

Amy

1. Low inventory in the early months of the year is going to result in more multiple offer situations than normal, which buyers may not be mentally prepared for. As I’m fond of saying: You snooze, you lose. Make sure if you’re actively looking that you have your financing in order and make haste when going to view newly listed properties. Don’t think it’s okay to wait until the weekend to go see them. They may be gone by then.

2. The number of transactions is going to continue to increase in 2013. I think there will be at least a 10% increase in the number of transactions over 2012.

3. More urban locations will stabilize on prices, while popular suburban towns will see increases in prices. I believe Hartford, New Britain, and Manchester will see price stabilization, while Glastonbury and West Hartford will see a 2-4% uptick in prices.

4. Short sales will be processed more quickly and there will be fewer new short sale and foreclosure situations.

5. The condo market is going to continue to trend slightly downward on prices. The number of condo transactions will remain about the same.

6. Sellers will become more bullish about the market and will be tougher negotiators than in recent years.

7. Appraisals will become less of an issue as more data points are added for appraisers to use during their price evaluations.

8. We’ll see more move-up buyers this year, as interest rates will remain low, prices for selling their existing homes stabilize and they feel increased job security. This will further help push up sales prices overall as the increased demand for higher end homes raises the median sales price.

Kyle

1. Deal volume will increase again, though not not by another 20%.

2. Buyers at the upper price points ($700,000+) will feel more confident and do meaningfully more deals.

3. Prices for single-family homes will rise noticeably in leading towns, and start to stabilize in lagging towns.

4. Condominiums will continue to look for the bottom in their market.

5. Mortgage rates will rise slightly.

Looks like the two of us have similar expectations for the 2013 real estate markets. And no, we didn’t cheat and just copy each other’s predictions. But we do talk about real estate all the time, so it’s not terribly surprising that our views are similar.

In summary, look for the momentum that the markets built up last year to continue into 2013 as the economy seems more stable and there are no obvious red flags on the horizon.

Reading Gen Y Tea Leaves

The attitudes and habits of Generation Y will determine the future of the American real estate market (and most other areas of our economy). They have different feelings and priorities when it comes to housing than previous generations. Members of Gen Y have been particularly hard hit by the choppy economic conditions that have dominated since the early 2000s.

The Atlantic recently published a piece called The Cheapest Generation and the subtitle “Why Millennials aren’t buying cars or houses, and what that means for the economy.”

One of the readers left a comment that summarized the setup for the article in two sentences. “Millennials have low job prospects and no money and therefore can’t afford to buy anything. And oh yeah, there’s that whole thing about crushing student debt since we all need a higher education to get a job but higher education is obscenely expensive.”

Which leads to the big question … if the financial position of Gen Y improves, will that group of Americans show more interest in buying homes (and other stuff)?

Amy’s Take

My opinion on Gen Y is that they are just being pushed to do things later in life when compared to earlier generations. I’m on the Gen X/Gen Y cusp, although I probably relate more to the Gen X generation. I, and many of my friends and work peers, got married and purchased a home in my late 20s. Then we had kids. For Gen Y I see these “life events” happening in their early to mid-30s. Some of it is the economy, some of it is their desire to travel and settle down later in life. I don’t think people give up the desire to “nest” in most cases, so eventually they will buy houses. Maybe a little later in life and maybe they favor smaller houses.

And maybe what we define as a house changes. I recently had someone ask me why people don’t buy multi-families in the West End and turn each unit into a condo, much like they would in Boston. I didn’t have a good answer for them. That seems like it would have appeal, even in the current market. As the Gen Y generation decides to buy, maybe we need to create a different product for them.

Kyle’s Take

Suppose the article’s hypothesis is correct, that there will be a permanent shift in buying attitudes and trends. What would that mean for the Greater Hartford real estate market?

The article notes Gen Y’s preference for walkable, mixed use, environments over traditional auto-dependent suburbs. We’ve observed those preferences in our business too. So when Millenials are able to get their own place (rent or own), they seem likely to be more attracted to somewhere like West Hartford, or even Hartford, than to the region’s more rural suburbs.

Owner occupied multi-family homes may be a nice fit for the Gen-Y buyer who isn’t opposed to owning and maintaining a property. Two and three family homes are widely available in Hartford and other urban towns. But they require cash for a downpayment and repairs/upgrades so once again it’s going to be difficult for a Millenial to get into the market right now.

Renting makes a lot more sense in a falling home price environment than a rising price environment. If home prices and rents are rising, then a homeowner has locked in the majority of their monthly payment while a renter sees their monthly payment rise each year as their landlord increases to the new market rental rate. Millenials are smart, and I think they’ll be more interested in buying if the recent house price trend isn’t an extended decline.

That’s what we think – essentially that members of Gen Y are likely to buy if the economic environment changes, and that they’re more attracted to mixed use environments than older generations. What do all of you think? What are you seeing among the Millenials that you know?

Mortgages: Purchasing Power versus Conservatism

We’ve been thinking a lot about mortgages lately. Something that jumps out at us is just how much of an opportunity the combination of declining mortgage rates and falling home prices has created for buyers.

Interest rates for 30-year fixed mortgages were around 6% during the early and mid-2000s when we bought our house. Those same loans are now available for interest rates of 4% or less, and 15-year fixed mortgages are available for just over 3%.

But what does this mean in practical terms? How can a buyer use this to their advantage?

First, consider a buyer with fixed monthly budget for the principal and interest payments of their mortgage of $1,800. Here is how much a buyer could pay back in the mid-2000s for a home within the $1,800 per month budget if they had the cash for 20% down, 10% down and 3.5% down.

I don’t know how much interest rates varied based on the down payment amount back then, so that assumption may not be exactly right. But I am often surprised that in today’s market everyone gets a very similar interest rate no matter how much the put down – as long as their credit is good – so let’s go with it for now.

Fast forward to today … how much additional purchasing power does a buyer have when lower interest rates are factored in? Keeping the monthly budget at $1,800 we can see that the buyer with 20% down can spend almost $100,000 more. Which, when the falling prices are considered, is a meaningfully better home than they could get for the same monthly payment in the mid-2000s. Those with 10% and 3.5% down also see a bump in their buying power and an ability to get into a nicer homes.

Buyers also have the option to go more conservative. Rather than using low interest rates to increase their purchase price, buyers can instead cut the length of their mortgage in half with a 15-year fixed rate loan.

The shorter mortgage does decrease the amount that buyers can spend, but some of that decrease is offset by the declines in market values since the mid-2000s. Sticking with the 20% down buyer, they are now looking at a $320,000 home instead of a $375,000 home. In most local towns that will not be quite as nice a property, but it’s a modest step down rather than a dramatic one. Is it a worthwhile tradeoff for debt averse buyers? Definitely.

It’s an interesting exercise to consider the possibilities, though not a perfect analysis. We’ve excluded the property tax and homeowners insurance escrows for the moment, since they vary from town to town. Both have undoubtedly risen since the mid-2000s, and do factor into the monthly budget. Even so, there is still an opportunity here.

Most buyers seem to be sticking with the 30-year fixed loan for their purchases. Existing owners tend to be the ones refinancing down to the 15-year mortgage, cutting 10 or more years off their loans while taking on a modestly higher payment.

My parents said something over the weekend that put this in a different kind of historical perspective. We were talking about the short-term rate of less than 3% that we’re trying to take advantage of, and they noted that they had never had a mortgage rate of less than 8% on any of their homes. Kinda makes the 6% and change where we started our journey seem reasonable…

Related Posts
The Appraiser is Coming!
Mortgage Rates and the Fed
Refinancing Our House
Refinancing Our House – Journey Underway
Refinancing Our House – Journey Completed
Mortgage Rates are Low
To Refinance or Not to Refinance (Part 1)
To Refinance or Not to Refinance (Part 2)

Using Assessor Data to Bid

Buyers in search of a bargain can be resourceful in finding support for a low bid. Zillow is the most common “proof” offered as justification for a lowball offer since Zestimates almost always err on the low side (which makes sense considering their business model). But every now and then someone tries to argue that a property’s taxable value is an important data point.

Towns in Greater Hartford set taxable values once every five years during a revaluation. They do their best to put a current market value on each property, but they use a statistical process that has an element of randomness and is not as accurate as actually putting the home on the market and collecting offers.

While talking to a local Assessor about the revaluation process, I also learned that in his town he tries to assign “market values” somewhere between 5% and 10% below what a property would actually sell for. We didn’t get into the specific reasons why, but from a practical point of view this seems important so that everyone in town doesn’t challenge their tax assessments. I also got the sense that this was a standard practice that was taught in assessor school.

What I’m trying to say is that the value of a property found in the Assessor’s database is almost never relevant to a purchase negotiation. That number is usually out of date, and was never super-accurate in the first place.

Forcing your agent to use that as justification for your opening bid (after they try to convince you otherwise) is not a winning negotiation strategy because it signals that you are irrational. You’re better off portraying yourself as inflexible by supporting your bid with a statement like “25% below the asking price is all I’m willing to pay because that’s all I feel the home is worth.” You probably won’t get the house using that strategy either, but at least the seller and their agent will respect your honesty.

Just so you know, sellers prefer not to deal with irrational buyers. You never know what they’re going to do, and whether they are going to follow the local conventions of a deal. So if you are prone to bursts of irrationality, then it will be in your best interest to keep it hidden until after the deal is signed.

One more point on the Assessor’s market value data. The town in which you’re looking for a home may have done a revaluation recently, and may have made the new “market values” publicly available on their website. For example, both Hartford and West Hartford updated their values in November of last year. Even though those numbers are fresh, and one could argue that it would be rational to use them in a negotiation, I would still advise against it. They are still systematically low, and they still contain an element of randomness. Most importantly, listing agents are likely to respond poorly to the argument that the town’s value is relevant, even if it’s not completely crazy.

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