“There’s No Place Like Home, There’s No Place Like Home” Home Values vs. Perception

I don’t think we’re in Kansas anymore.

It shouldn’t be news to anyone who ever reads the newspaper, surfs the Internet, watches TV, listens to the radio, or generally communicates with the outside world in any way at all: the real estate market has been in a downturn.

Yet maybe it’s one of those things that happens to everyone else but not to me.

I don’t know what else could explain the discrepancy between actual home values and people’s perception of their home values.

Last week Zillow released its Home Value Reports for Q4 2007.  It’s no surprise that the report found that homes values declined in the last three months of last year.  It also was no surprise that many homeowners owe more on their mortgages than their homes are actually worth. Homeowners in areas that experienced huge price growth – and a correspondingly large drop – are hit the hardest.  Some areas outside of Phoenix (the so-called “bedroom” communities) fit this bill.

There are two simple reasons why so many homeowners have negative equity (owing more than the house is worth) right now:

1. Relaxed lending standards over the past 4 or 5 years have allowed many borrowers to purchase homes with no down payment, so they started off with 0% equity.
2. Even a modest price decline – say, the 2-3% we’re seeing in some of the more established parts of the Valley – will put a homeowner who started with no equity into the red.

What surprised me was how many homeowners who do owe more than their homes are worth thought they were sitting pretty.  In our neck of the woods – the Western U.S. – 36% of homeowners thought the value of their homes had increased; 30% thought the value hadn’t changed; and only 34% knew the value of their homes had declined.  In reality, home values declined for 67% of homeowners.

Nationally, Zillow found that among those homeowners who bought in the last year, 30% have negative equity.  For those who bought two years ago, 39% now have negative equity.  Yet 77% of homeowners believed the values of their homes have stayed the same or increased.

I’m definitely a glass-half-full kind of person, but I’m also a big advocate of being honest with ourselves.  When clients want to price their homes at far above market value, I always caution them to understand that as much as their homes are worth to them – or as much as they paid for them – only the current market will determine how much they’re valued at, and how much they’ll sell for. 

Homeowners – whether you’re planning to sell or not – would do well to take an honest stock of their home finance situation.  As I always say, knowledge is power.