A couple of days ago, this question came in from the Ask the Broker page:
Question: I love my home .. bought in 2000 for 289,000 re-fi in 2006 at 376000.00 todays worth 305,000 according to zillow. I’m torn, should I short sell and cut my losses or should I keep fast and steady. I’m trying to figure out my home appreciation in 10 years. I reside in peoria zip 85383
What we have here is basically an unanswerable question. Please allow me to explain why”¦.
I look at this as a two-parter ”“ 1) “should I short sell and cut my losses or should I keep fast and steady”; and 2) I’m trying to figure out my home appreciation in 10 years.
Should I short sell and cut my losses or should I keep fast and steady?
First, you really should not use Zillow.com as a basis for your home’s value. Zillow (among others) uses an algorithm to calculate your home value. Basically it pulls public records for information on your home and others around it that have sold recently. Ostensibly using such “comparables” is correct ”“ it’s what appraisers and real estate professionals use to estimate the market value of your home. The problem with any AVM (Automated Valuation Method) is that a computer can determine who your home really stacks up to said comparables. A computer can’t see your home, or the others around it.
By their own admission, Zillow’s “Zestimate” (their estimate of a homes value) has a median error of 12.7% in Maricopa county. They also state that 65% of the real estate transactions in Maricopa county had a Zestimate within 20% of the actual sales price. Simple math tells us that 35% of Zestimates in the Phoenix area are off by more than 20%.
In other words, the $305K valuation you are seeing in Zillow may not be accurate.
How do you get a better idea of the market value of your home? You can either pay for an appraisal, or have a real estate agent prepare a CMA (Comparative Market Analysis) for you. And of course, not all appraisals or CMAs are created equally either”¦
All that being said, refinancing in Maricopa county in 2006 means it’s probable you are indeed underwater ”“ you owe more on your home than you could sell it for in today’s market. How much you are actually underwater is another question. It may not be as bad as Zillow indicates (to be fair to Zillow, that Zestimate could be spot on. Or you may be deeper underwater than indicated”¦).
So”¦ do you short sell and cut your losses or keep fast and steady?
I can’t answer that question.
Short selling may not even be an option. Unless you can prove a hardship to your lender ”“ prove that you can not continue to make the payments ”“ it is unlikely they will approve a short sale. LOTS of people are underwater. I’ve yet to meet anyone that likes making payments on an home that isn’t worth now what it was then. But your not liking to make the payments means nothing to the lender. To be honest, they could care less whether you like it or not”¦ So if you still have the financial means to make your mortgage payments, short selling is probably not even an option.
If that’s the case, keeping fast and steady, getting a loan modification (good luck with that), “walking away”, or renting the home may be your only viable options. Yes, this stinks to high heaven, but that’s reality.
(Someone is likely to chime in and say, “But some lenders are approving short sales without proving a hardship”. That may, or may not, be true. I’ve personally not experienced such an approval. Heck, in a majority of cases lenders won’t approve a short sale even if you can prove a hardship”¦)
This brings us to the second part of the question,
I’m trying to figure out my home appreciation in 10 years
I wish I could predict home appreciation 10 years out. But there are way too many factors to comprehend, many of which are impossible to predict, for anyone to be able to accurately state future home appreciation rates. A historical analysis of appreciation rates is about the best we can do.
Here’s a chart showing average annual appreciation for Peoria since February 2001 (click image for larger view):
As you can see, it’s been a wild ride. Annual appreciation peaked at about 52% in August 2005, and bottomed out at ”“35% in March 2009. The good news is we appear to be back to zeroish. What happens next is really anyone’s guess. If you want my guess, I’ll say that appreciation rates will bounce along at 2 ”“ 3% for the next several years, possibly returning to long term historical appreciation of 4 ”“ 5% after that (along the lines of the first third of the chart above).
And I reserve the right to be completely wrong.
What is going to drive future appreciation? The economy, the credit market, and the composition of the housing inventory. I wouldn’t even hazard a guess as to the future of the economy. I don’t think the credit market will ever return to where it was in 2004 ”“ 2006 ”“ where all that was required to get a mortgage was a pulse. In fact, I hope the credit market never returns to that state. I’m of the opinion that the ridiculous run up (and subsequent destruction) in appreciation rates was due in large part to lax lending standards.
As for the housing inventory, there is still a dearth of “distressed properties” (foreclosures and short sales ”“ aka pre-foreclosures) for sale throughout the Phoenix metro area, including Peoria, as evidenced by this chart:
58% of the current listings in zip code 85383 are distressed properties. Until this inventory bleeds off, which could take years, the market can’t do a whole lot with respect to home appreciation.
Depressed yet?
The Bottom Line
The “What should I do?” questions are exceedingly difficult to answer. Especially if one isn’t privy to the questioners financial situation. “Strategic Default” (basically walking away from your home/mortgage) is a very personal decision ”“ one that I could never answer for someone other than myself. A decision to short sell, if that is a viable option, is also a very personal decision. All I can do is arm someone with information (limited as it may be) and leave it to them to decide for themselves what is best given their personal decision.
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Charts from CromfordReport.com using data from public records and data licensed from the Arizona Multiple Listing Service (ARMLS). Cromford Associates LLC, ARMLS and yours truly, Jay Thompson, expressly disclaim and make no representations or warranties of any kind ”“ express, implied or statutory ”“ as to the accuracy of the data, nor its merchantability or fitness for any particular purpose.
In other less legal-like words, if you use this data to make personal, business or investment decisions and something blows up, it’s not our fault and you can’t sue us.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
wow the thing that jumps out at me is how close together the short sale and foreclosure values are. They used to be much different. Short sales used to be about half way between foreclosure and equity sale. That is not good news for anyone, not good news for the banks who used to like short sales because it saved a lot of money, not good for sellers or agents who do short sales because that means it is going to be harder for a short sale to get approved unless it is a strong offer.
Yes it is still better than a foreclosure because of the carnying costs, but i could very possibly see why banks are starting to require the seller to come to the table with money more often, because they can stand to make a point now because the loss is not as great.
I've been trying, without success, to find some historical / trend data on this. Would be interesting to see…
It looks like their only motivation for selling is that the price of the house has gone down since they bought it. Buying a house isn't like buying something at Macy's. You can get a refund later on if the item goes on sale.
Assuming the Zillow figures are accurate, the person wouldn't be underwater right now if they hadn't done the cash-out refinance. What did they do with the tens of thousands of dollars they got out of the refinance? Did they buy a new Cadillac Escalade? Did they go on an around-the-world cruise? Why should anybody else shoulder the burden for this person? When you sign a mortgage, you are giving your word that you will pay the loan. Sorry, but you are responsible for the things you do. If the price of the house never went down, they probably wouldn't even think about selling. It's amazing all the banks haven't gone bankrupt yet.
I'll add my two cents…I predict we will have a snap bounce of appreciation during 2011. Homes are currently selling for less than replacement cost. Homes are priced well below what they cost to build. I think the market in Phoenix will see a snap appreciation of at least 5-7% in 2011 and then revert to historical 4-5% annual appreciation.
Hmmm. To quote my friends from Myth Busters, I'd call a snap bounce "plausible". Interesting thought….
What if recession comes within these 10years..
Precisely. That's why I said the economy is a factor in future appreciation. And who the heck knows what the economy will do over the next 10 years….
Jay I run into the what will my home be worth in ten years question all the time. I suppose I look like a psychic. My answer is always that I can't answer that question and if they meet a real estate agent who can then they have always just met somebody that is willing to blow smoke up their rear ends.
I agree Daniel. If anyone comes across someone willing to predict what will happen in 10 years, they should run, not walk, away.
Jay, I like how you answered this very difficult question. Many agents would be tempted to offer advice to this emailer without knowing the total scope of the potential seller's situation.
I am a bit surprised by your comment regarding some short sales in AZ not receiving approval even with a hardship. Up here in my neck of the woods I've not experienced that yet, but the North West housing market does seem to lag behind the national trend.
Brett –
I think the problem here is we've got over 16,000 homes currently listed in the MLS as a short sale. The lenders are overwhelmed. I know of many examples where a solid short sale offer was submitted where the sellers had obvious hardship, only to watch the offer languish at the lender until the home was foreclosed on. And resold at thousands less than the short sale offer….
I am thankful I found an informative article like this. It seems that we all want to
be legible in all matters.
hey, i follow your blog for updates… nice work.. 🙂
I'm curious why no one has asked what exactly they did with that refinancing money in 2006. Are we to feel sorry you took that much equity out of your home if you used it to buy cars, trips, redo your home. Or maybe you used it due to a job loss or sick family member. Beware..if you have heloc on your home…most lenders will only agree to a short sale if you sign a note for that heloc. Bankruptcy becomes a better option at that point.
Mike – I didn't ask why they refi'ed in 2006 because it's none of my business. But, you bring up a very valid point. What that money was used for can definitely impact how the lenders (and the law) views the situation.
So did this person already took out 87,000?
Please let me know.
bought in 2000 for 289,000 re-fi in 2006 at 376000.00
376000.00 – 289,000 = 87,000
So they already pulled 87,000 in value out?
todays worth 305,000 according to zillow
So they have already got:
305,000 – 289,000 + 87,000 =
103,000
They have made $103,000 on this house?
please let me know if this is correct? Or exactly where my calculations are wrong?
thank you
Good answer to a loaded question, Jay. I would further ask the questioner what their motivation is for selling. Is it bitterness that the home is valued for less (albeit, by zestimate which is worth as much as the paper it's printed on)? If there is little/no need to sell, ride out the market. Competing in a market flooded with other distressed properties will: a- not get you the price you are looking for (unless priced very aggressively) and b- be a depressing process during which you will feel powerless awaiting a response from the lender. In my market SS/REO's represent a small percentage of the market (6-8% fluctuating) yet represent the majority of properties being sold (40-55% for any given month) or in escrow (50% +). Great post, Jay.
Justin,
Great post. Love the caveats. I have seen Zillow off 40% and say a property closed when it hasn't. It is ball park at best. Robots make lousy appraisers!
Nice explanation of Zillow. I get this same question all of the time and let them know the same thing you did here.
Thanks for your candid obeservations. I also agree that you can`t bas your value on a site like Zillow.com. You absolutely need to have a local firm give you a proper appraisle.
I`d also like to add that this is not the time to sell period. If anything try to add value to your home by making improvements
That is a good advice. And make sure that any improvement will add value to your homes, and its value will appreciate in the coming years.
Good information..Property price index is raising day by day.
Recently 60 Minutes ran an interesting story about the dilemma that millions of people underwater in their homes in America are now faced with the decision to ditch their homes because it is worth half of what their mortgage is. Interestingly, we are getting a lot of requests from landlords to run a tenant screening report on their prospective tenants who have been foreclosed upon. Even though this does terrible things to the credit report, many landlords seem to be understanding that these tenants really could afford their rent. They are just walking away because it makes no financial sense. Interesting ethical issues to think about.
Thanks for this information, Really appreciated…
Nice experience shared with interesting ideas and good details.
The Feds are talking more and more about cracking down on that "strategic default" option. If home owners can afford to pay, they need to think twice about claiming hardship for a short sale.
Zestimates are reported as being 23% off market values, by zillow's own admission. The decision to stay or go is something that anyone who is "underwater" should not be taken lightly.
My opinion is that if you can afford your home, comfortably affording the mortgage. Then staying put makes a lot of sense, unless you need to move for work/marital changes etc.
It makes me wonder when the market does turn about how many people will be able to qualify for homes due to the damage that a short sale does to credit ratings.
Its just a matter of time til everything is back on track again.
One thing that might happen, if consumers put enough pressure on their elected officials, is to bankruptcy judges to “Cram down” personal residences in chapter 13 bankruptcies. Right now, the Nobleman decision does not allow consumers to do that.
Cramdown means reducing the note to the FMV of the home even without the noteholder’s approval.