I've written in the past about how homeowners are delusional when considering what their home is worth. Zillow analyzes this perception gap quarterly, and agents live it daily. Who among us hasn't struggled with an unrealistic seller who just can't accept the fact that their home is worth less than they'd like?
Well an economist friend from Deutsche Bank sent me a link to an interesting report today -- an academic study from June titled "How well do individuals predict the selling prices of their homes?". No surprise: not very well.
From the study: "We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to establish a strong correlation between accuracy and the economic conditions at the time of the purchase of the property. While most individuals overestimate the value of their properties, those who bought during more difficult economic times tend to be more accurate, and in some cases even underestimate the value of their house. We find a surprisingly strong, likely permanent, and in many cases long-lived, effect of the initial conditions surrounding the purchases of properties, on how individuals value them. This cyclicality of the overestimation of house prices provides some explanations for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates which could jeopardize their ability to live up to their financial commitments."
In short, although most people overestimate the value of their home, "Those who bought during tougher economic times are, on average, more accurate in their assessments." On the other hand, those who bought during good times tend to vastly overestimate their home's value. So since we had a great economic boom time over the last 10 years, current homeowners have unrealistic price expectations for their homes. Except those who have checked Zillow lately, of course. ;)
Comments (1)Subscribe to CommentsComment