A Blog by Jonathan Low

 

Jul 20, 2011

Homeowners in Denial About Property Values

Denial, as the saying goes, is not just a river in Egypt. Four years after the collapse of the US housing market homeowners are still having trouble accepting reality.

The facts are that housing prices remain depressed. Even those who bought after the crisis, thinking they had paid a reasonable price, are finding that the the market has come down even further since then.

The double whammy of unemployment, stagnating pay and reduced credit combined with too much housing inventory has reduced demand. It becomes a self-reinforcing cycle. The credit that fueled the boom in consumer purchases of all kinds was based on assumptions about increasing real estate values. That train is parked at the station and the engine is dead. Overly optimistic assumptions about values is the flip side to denial of this reality. This inspires a refusal to sell in hopes of better times, which in turn, is an obstacle to clearing the market and reinforces the pressure against new sales.

The good news, if it can be called that, is that the US economy before the fall had been derided - and properly so - as a bunch of people selling real estate to each other. That game is over. The sooner we write it off and move on, the sooner the economy will revive. JL

Ann Carrns reports in the New York Times:
Homeowners, especially those who bought their houses after the real-estate bubble burst, are still having trouble accepting just how much the values of their properties may have fallen, says a new report from the real-estate site Zillow.

Current sellers who bought their homes in 2007 or later, an analysis of the site’s home listings shows, are overpricing their properties by an average of 14 percent.
Sellers who bought their houses before the bubble, and those who bought during the big run-up in home values, also are overpricing their homes, but not by as much. Those who bought before 2002 are pricing their homes roughly 12 percent over market value, while those who bought from 2002-06 price them about 9 percent over market value.

In the analysis, Zillow compared the asking price of one million homes for sale to the homes’ previous purchase price, then factored in the change in the Zillow Home Value Index for the respective ZIP code, to determine an estimate of that home’s current market value.

Stan Humphries, Zillow’s chief economist, says those who bought post-bubble, in 2008, 2009 or later, seem to think they escaped the worse of the housing market debacle and tend to price their homes too high as a result. But 2006 was just the start of the housing recession, which continues today; home values are now down nearly 30 percent from the market’s peak. And, values have fallen about 12 percent from January 2009 through May of this year, he says.

That means, he says, that even people who bought after the bubble burst need to take a hard look at what has happened in their local market since they bought their home. Traditionally, people tend to overprice their homes a bit anyway, to allow room for negotiation. But unrealistic overpricing in the current environment, he says, means properties stagnate.

Sellers, he said, need primarily to consider comparable sales and asking prices in their market when setting an asking price for their home. Factoring in what they paid for their home, or how much they owe on their mortgage, “leads to conclusions that are divorced from the outside market,” he said, and the market determines whether a buyer is interested in your house: “The buyer doesn’t care what you paid or what your mortgage is.”

Of course, some sellers who owe more than their house is worth are limited in how low they can price their home because selling for less than their mortgage means they’ll have to negotiate a short-sale with their bank. “They’re hoping against hope that they can sell at a higher price,” Mr. Humphries said.

But others are simply faced with a reluctance — understandable, to be sure — to sell the house for less than they paid. “They could price more aggressively, but there’s a psychological hurdle,” he says. “They don’t want to realize a loss.”

Humphries foresees home values continuing to fall through the middle of next year for a variety of reasons, including persistent unemployment, a significant pipeline of homes in foreclosure, as well as high rates of homes with negative equity, which means many more will likely end up in foreclosure. A return to a “normal” market is likely at least three years away, he says.

Is your home on the market? What factors went into your asking price?

0 comments:

Post a Comment