Yesterday a study originating from the Haas Institute for a Fair and Inclusive Society at the University of California, Berkeley began making the rounds through the media. Here is the full document.
The report identified Hartford, CT as the city with the “Highest Incidence of Negative Equity” in the entire country. They found that 56% of Hartford homes are underwater, meaning that the owner owes more on their mortgage than the home is worth in the open market. The table of the top 100 cities can be found on page 23 in the report.
Although there are certainly underwater property owners in the City, and related financial distress, the methodology used in the study is very likely flawed – overstating the problem in Hartford.
Page 37 of the Haas Institute report notes that the negative equity analysis used for the rankings comes from Zillow, with the authors referring the reader to this page on Zillow. My understanding of the process is that Zillow used their “Zestimates” and as the current value of a home, and data from TransUnion for mortgage amounts. The Hass Institute study authors then used the resulting negative equity Zillow calculated as the primary variable to sort the country’s cities and metro regions.
Zillow Zestimates have been consistently inaccurate in the City of Hartford. We have written about this before, here and here, with a representative from Zillow even engaging in the discussion. There has been no resolution – Zillow values continue to be well below what buyers are willing to pay for non-distressed homes. Our theory is that Hartford’s split assessment ratio is mucking up the Zestimates. Residential properties in the City are assessed at about 30% of market value instead of the 70% that all the other towns/cities in the state use.
We will send this along to the authors of the study and encourage them to do their own research into the potential data problem. The methodology seems flawed when considering housing in the City of Hartford. The questionable conclusion that they reached, which has been trumpeted by the local and national press, reflects poorly on the city in a way that’s not really fair. Ideally we would like to see the authors edit the report if they reach the same conclusion that we do.
This study has been making the rounds at my workplace.
I thought the study’s recommendations were pretty drastic, and with your analysis of the use of Zillow as a valuation tool, I now think the recommendations may be dangerous.
While I recognize that predatory lending is a significant issue, most problematic loans aren’t the result of predatory practices. And although some have argued this, the housing crisis was not precipitated by compliance with the Community Reinvestment Act or Equal Credit Opportunity Act (which for some, is all about lending to borrowers who aren’t “credit-worthy.”).
While I am concerned for homeowners and for the stability of our cities, I also feel frustrated when people suggest that banks should take the hit and refinance properties at current market value. Both banks and consumers take on risk during a purchase transaction, and there is no guarantee of appreciation for a homebuyer.
I received the following pieces of advice from my manager (a banker!) when I was 25 years old:
1. Your house is a place to live, not an investment
2. Never take out a home equity line of credit
This was pretty unexpected advice coming from a banker, but I’ve been grateful for it from the moment I decided to buy my first house.
It’s really important for people to receive education in personal financial management, but there really isn’t an incentive to provide financial industry-agnostic education. The financial management education programs I’ve seen (and taught) don’t ask a lot of questions about how individuals should participate in the economy. The assumption is that people (not consumers, people) will participate in the traditional/available financial system which encourages the accumulation of debt through the use mortgages, credit cards and car loans. We don’t think of these things as “predatory,” but in some ways they are, particularly credit cards and car loans, which enable people to buy more than they need (which is ok, but people maybe don’t know the difference between “need” and “want” sometimes).
Ugh. This is all so complicated, and I’ve gotten very “meandery” here. My thoughts are always shifting, and tomorrow I may feel differently about what I wrote today. But the bottom line is that I am very passionate about people and money and debt and I wish with all of my heart that people could talk about these things without feeling shame about the fact that they aren’t educated about personal finance, or may have made financial decisions without understanding what they were doing, or have credit card debt, or haven’t been able to save a penny, or whatever.
Passion exhausted for the day.
PS: I ignored my manager’s advice and got a home equity line of credit once. I realized very quickly why he advised against it and paid it off as soon as I could. Like right before the housing crisis. Thank goodness for that stroke of luck.