How Zillow Is Overestimating the Value of Your Home

Buying a home is arguably the largest investment you can make. You purchase your house, probably put work into it to make it fit your style, and hopefully add improvements along the way that will increase its value. So when it’s time to sell the house, you want to make sure you’re getting the best price for it. That often includes working with a real estate agent in your area, but it can also mean researching online ahead of time to get a good idea of a fair market price.

But the problem is that, sometimes, those online estimates inflate what homes are actually worth, causing a rift in expectations. And when Zillow says the price is higher than a realtor wants to ask, it can create conflict when trying to sell your house.

It’s a conflict that has begun to spring up more frequently, as growing numbers of people turn to online sites to price check before contacting a realtor. A total of 105.4 million people visited real estate websites in January 2015, an increase of about 24% from the year before, according to information provided by analytics website comScore. Within those categories, Zillow accounted for 57.4 million visitors to their site. Trulia, which was formally acquired by Zillow on February 17, accounted for another 36.3 million unique visitors, representing 71% of the total visitors in the real estate category.

Zillow’s staff knows that prices can vary from online to what the sign says in your front yard. It’s why the website has a section devoted to explaining how the “Zestimates” are created, the information that’s used, and some of the variation people can expect in certain areas around the country. Zillow lists Zestimates for about 100 million homes nationwide, but Zillow reports it has an 8% median error rate across the country. That means that about half the Zestimates fall within 8% of the selling price, and about half fall out of that range.

To put that 8% into perspective, assume there’s a house that sells for $350,000. About half the time, Zestimates will show a fair price between $322,000 and $378,000, the 8% spread of about $28,000 on either side of that selling price. But the other half of the time, it could be outside that range. And as always when working with percentages, the value of the home directly impacts the range. For a home worth $500,000, that spread on either side of the selling price could be $40,000.

In certain parts of the country, that variation is even more severe. Twenty-five states have median error rates that fall below the national average, with Virginia and Nebraska at 5.5% and 5.7%, respectively. But West Virginia, at the other end of the spectrum, has a median error rate of 13.6%. Zillow doesn’t keep data on every county across the country, but some such as Dade County in Georgia have error rates of 35%. The highest listed in the data from December 2014 is Apache County in Arizona at 69.4%.

The website uses an algorithm to compute the Zestimates from public information including paid property taxes, the actual sale prices of the home in previous years, the location of the home, the square footage, and the number of bedrooms and bathrooms, among other factors. The algorithm can’t be edited by human input. However, homeowners can “claim” their home online and input more accurate data, which improves the accuracy of the Zestimate they receive. The company says they use public information records, which they acknowledge can sometimes be outdated or incorrect.

If you’ve been taking Zillow’s predictions as a guarantee, you’re not alone. A recent Washington Post articlecites several real estate agents and homeowners confronted with the issue, and the comments section below hosts dozens more. The real problems occur when homeowners assume the Zillow price is the fair market value, and refuse to drop an asking price that’s unrealistic for their market. But according to Zillow CEO Spencer Rascoff, the website was never meant to be an authoritative voice. Instead, Rascoff told Jeremy Hobson of the radio show Here & Now that the site is meant to be a starting point. “Zillow provides all this great free information for consumers as a starting point and the consumer is also undoubtedly much more powerful today than 10 years ago before we started. We think that’s very important,” Rascoff told Hobson.

The Zestimate is not supposed to take the place of an appraisal, and when homeowners are actually looking to put their house on the market, people should still contact experts, Rascoff said. “If you want a more accurate opinion of your value, you should consult an appraiser or a real estate agent,” he said. A shift has happened because of sites like Zillow, Rascoff said, because people can now get a preview of the data that are used to determine the value of their homes. But people still need realtors and other professionals to interpret that data and what it will mean for selling their properties, Rascoff said.

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10 Reasons the Housing Market Could Go Ballistic This Spring

The U.S. housing market could get a major boost this year, specifically for single-family homes—especially among first-time buyers. Here’s why.

1. Everyone sees that the zero interest rate party is coming to an end. If you’ve been waiting to borrow, it’s getting close to “now or never” time. Fear of missing out (what the kids call “FOMO”) is as powerful a motivator as anything.

2. Demand is pent-up, and pent-up things eventually get un-pent, sometimes all at once. The number of people between ages 35 and 39 is critical to household formation, and we are currently seeing an uptick in this demographic category, back to prior peaks.

3. The notion that millennials want to stay home forever is not accurate. They’re ready to bust out, and rental prices are comparably high in several key regions.

4. Employment among college-educated people (read: potential home buyers) is as tight as a drum.

5. In January, average hourly earnings jumped 0.5% for all American workers. This is just one month’s worth of data, of course, but it is significantly above trend (average hourly earnings have grown at an annual average of just 2% in the post-crisis recovery period). When people get one-time tax cuts or bonuses, they save them. When people get raises, however, they buy stuff and improve their standard of living.

6. At the low end of the income spectrum, things are brightening. Wal-Mart, Aetna, and TJ Maxx are giving a million minimum-wage earning Americans a raise this year. These companies are the tip of the spear. Others will be forced to follow. Twenty-nine states have unilaterally hiked minimum wages in the last two years. If the federal government acts this year on a proposed 40% national wage hike to over $10 an hour, look out above.

7. If you believe, as I do, that the stock market acts as a discounting mechanism and foreshadows the near future, then you may want to take a glance at the iShares US Home Construction ETF ITB. It’s just broken out above major resistance dating back to the May 2013 “taper tantrum,” when the Fed first raised the specter of rising rates. The homebuilding stocks within this ETF are now trading higher than their peak prior to those fears, which signals better fundamentals to come, in my view.

8. Animal spirits in the stock market have finally, truly taken hold and participation is broadening out from just the wealthiest 20% of investors.

9. The Federal Reserve’s survey of senior loan officers says that credit standards are easing.

10. I’m actually cheating a little because a housing market uptick is already in progress. Last month’s ground-breaking on new homes hit the equivalent of a 1.07 million annual run-rate. According to Bloomberg data, this is a jump of over 6.4% from 2014.

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7 Real Estate Myths Busted by Zillow Talk

In a new book, Zillow CEO Spencer Rascoff and the firm's chief economist Stan Humphries question some age-old maxims of real estate. "Zillow Talk: The New Rules of Real Estate," which was released this week, shares insights gleaned from analyzing extensive residential real estate data Zillow has collected over the years.

Here are seven myths they try to bust:

— The most important rule in real estate is location, location, location. Not true, they say. Instead, the most important rule in real estate is future location, future location, future location. The authors say home buyers eager to maximize their returns must look 10 or 20 years down the road to assess what will happen to the neighborhood.

— Buy the worst house in the best neighborhood. Wrong! The house will always be the worst house in the neighborhood, and buyers in a great neighborhood are likely to look past your ugly duckling when you go to sell, meaning the price gains on these "worst houses" actually underperform their surrounding neighborhood rather than being carried along with them, Zillow found. Instead, the authors advise a shopper to buy the worst house in the hottest neighborhood — and to do so within the first five years of the neighborhood getting hot. In a subsequent blog, I'll share with you signs I looked for when house-hunting in up-and-coming neighborhoods in Charlotte, N.C., and San Francisco over the years.

— Foreclosure discounts offer compelling investment opportunities. The authors say calculations of dramatic discounts offered in buying foreclosures often overstate the case. That's because the foreclosed property is usually compared to the prices of non-foreclosed property, an apples and oranges comparison, rather than other foreclosures in the area. According to Zillow, the national foreclosure discount in September 2012 was just 7.7 percent, and an even smaller 4.7 percent in San Francisco. I suspect the foreclosure discount is even narrower now.

— Remodeling the kitchen, with a lot of fancy upgrades, is one of the smartest moves you can make to boost your home's value."Kitchen renovations, at any level, offer among the lowest return on investment of the home improvements we studied," the authors said. Instead, a modest bathroom makeover might have the biggest impact on your home's value.

— List early in the year to catch the spring home-buying rush. Nope. With more home buyers starting their search online, it's better to list in late March, generally speaking, so your listing is near the top of search results. Or as the authors put it, "you shouldn't list your house for sale before March Madness or after the Masters."

— Home ownership is the foundation of the American Dream. The authors argue that an analysis of Zillow's data indicates public policy designed to boost homeownership among low-income buyers has the opposite effect of lifting people out of poverty. That's in large part because less affluent neighborhoods, where many of these new home owners can afford to buy, experience lower appreciation and higher price volatility than more affluent neighborhoods, according to Zillow Talk's analysis.

— The mortgage interest deduction is essential to the health of the nation's real estate market. The authors concede that they're taking on the third rail of real estate, and American politics, in calling the mortgage interest deduction ill-conceived public policy. The authors make the case that the federal government is essentially spending $100 billion in the form of lost tax revenue annually to help Americans living in homes that cost about $865,000. And yes, that includes many of us living in the Bay Area. "It's especially ironic that the (mortgage interest deduction) is consistently sold to the American people as a populist policy to help the little guy," the authors write. "In reality, it's the exact opposite."

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Rate Plunge: Time to Refinance If Your Mortgage Is Above 4%

From Jeff Lazerson of Mortgage Grader in Laguna Niguel.

From Freddie Mac’s weekly survey: The 30-year fixed rate dropped an astonishing 14 basis points, from last week’s 3.87 percent, landing at 3.73 percent. That’s the lowest rate in 19 months and marks the eighth consecutive week of rates below 4 percent.

The 15-year fixed dipped 10 basis points, from last week’s 3.15 percent to 3.05 percent this week.

The Mortgage Bankers Association reports an inexplicable 37 percent drop in application volume on an unadjusted basis from the previous 2 weeks.

BOTTOM LINE: Assuming a borrower gets the average 30-year conforming fixed rate on a $417,000 loan, last year’s rate of 4.51 percent and payment of $2,115 is $189 more than this week’s payment of $1,926.

WHAT I SEE: From rate sheets hitting my desk that are not part of Freddie Mac’s survey: Locally, well qualified borrowers can get an eye-popping 30-year fixed rate at 3.375 percent and 1 point or pay nothing and take 3.75 percent. The 15-year fixed is 2.75 percent at 1 point or 3.25 percent at no-cost.

WHAT I THINK: If I had a nickel for every time I received a phone call over my 29 years originating loans from a consumer saying I should have, would have, and could have pulled the trigger when rates were lower but for…, I would be really rich and really retired.

Rates have taken an incredible swan dive in recent days. Refi-mania is bold and back for sure. Purchase mania is just starting. Just do it. Take procrastination out of your vocabulary.

For refinancers, if your fixed rate is currently over 4 percent, you need to focus, shop around and take action now.

If you have any adjustable-rate mortgage and it’s over 3.5 percent, ditto for you. Either go to fixed or, if you are staying a short period of time, get a lower rate ARM at no-cost.

If you are home shopping, you can always sacrifice a little more for a higher price to take advantage of lower rates. All you are doing is renting money. Don’t haggle too much with the seller over small price differences. You risk some competing buyer coming in right behind you, swooping up the palace that you thought was going to be yours.

Payments are almost $200 less per month than they were one year ago on a $417,000 loan. Maybe your payment is $10 or $20 more per month if you pay more for that house, but you gain big-time through property appreciation.

It almost never makes sense to pay points and fees for your loan. No-cost, no-fee is the way to go.

The only exceptions are relocation buyers who are given points and either use it or lose it or if you have to buy your rate down to qualify. The way mortgages are priced these days, the buy-down cost is almost always too expensive compared to accepting a no-cost loan at a slightly higher rate.

If you pay nothing for your loan, you can refinance again if mortgage rates drop further. It’ll be worth it if you get, say, $100 or more per month reduction in your payment.

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Best Time To List A Home For Sale? Winter.

So you've begun thinking about selling your house and you figure: Let's wait until the spring or early summer before listing. The yard will look its best and potential buyers will be out in force. And everybody knows that winter is dead time for real estate.

Right? At least that's the widely held belief. But national statistical studies suggest it's not necessarily the case. Winter — officially Dec 21. through Match 20 for the upcoming season — can be a surprisingly advantageous time to list, shop, negotiate and buy. Consider some findings by researchers at Redfin, the online realty brokerage.

Real estate website Redfin has studied home listing, sale price and time-on-market data from 2010 through this past October from around the country, updating a two-year analysis it completed last year. It concluded that if you want to sell for more than your asking price, listing in December, January, February and March gives you a better chance on average than if you list any time from June through November. During the last three years, listing during those four months has produced higher percentages of above-asking-price sales than listing during any months other than April and May. In 2012, as the housing market rebounded, December listings produced the highest percentage of above-asking sales for the entire year — 17%.

If your goal is to sell relatively quickly, February "is historically the best month to list, with an average of 66% of homes listed then selling within 90 days," according to Redfin. In the two-year study completed last December, researchers found that in each of 19 major markets, including cold-weather cities such as Boston and Chicago, "home sellers were better off listing their homes in the winter than during any other season."

Researchers are quick to note that the advantages of listing in winter compared with other seasons are not huge. But the fact that winter produces at least competitive or better results by some measures should encourage some potential sellers to get into the game sooner rather than later.

Nela Richardson, chief economist for Redfin, said houses "that are priced right and show well can sell any time" of the year. What many potential sellers may not know, however, Richardson said, is that shoppers who are active during the winter months "are serious buyers. Most people are not window-shopping" in December and January, as many do in the spring months.

Also, some sellers pull their unsold houses off the market during the winter, hoping for better results in the spring. By doing so, they leave a smaller inventory of active listings — lessening the competition among sellers who list in January and February, ahead of the pack.

Winter-season buyers may find some sellers more flexible about negotiations over prices and terms than they would be during the middle of the spring. Mary Bayat, a broker active in the Washington, D.C., market and chairwoman-elect of the Northern Virginia Assn. of Realtors, said that in the last few weeks she has participated in three deals involving sellers who were far more open to negotiations than they had been months ago.

"People get more realistic at this time of the year," Bayat said, especially when their properties haven't attracted serious offers during the summer and fall. So it's a good time for smart shoppers as well.

Paul Stone, an agent in Redfin's Denver office, said many large corporations in his area transfer employees and hire new ones early in the year. That creates opportunities for wintertime listers who opt not to wait for the spring.

Bottom line: Real estate does not hibernate from December through March. More than 5 million homes typically are resold annually in the U.S., and many of them are listed and sold during the winter months. In strong local housing markets such as Los Angeles, San Diego, Phoenix, Seattle, Austin, Boston and Washington, D.C., the likelihood of selling your home within 180 days is highest when you list during the winter months compared with any other season, according to Redfin's 2013 study.

Winter is warmer for real estate than you might think.

  

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