by Mike Kimel
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 per cent above market value. Those who bought before the housing run-up, prior to 2002, overprice by nearly 12 per cent. Somewhat surprisingly, sellers who bought during the run-up, from 2002-2006, seems to be the most realistic, pricing their homes 9 per cent 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 realising 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.)
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 20 five per cent 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 the market 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.
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.
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