The Pitfalls of Zillow.com

If you are a potential home buyer or home seller, how would you start going about conducting research on the process? Would we go to the library and borrow some books? Maybe. Would we go to Barnes and Noble and pick up some real estate magazines? Possibly. How else might we start? Ok, lets stop kidding ourselves. When we have a question or want to dig up more information on a particular topic, whether it be real estate, automobiles, or the best new digital camera out there, we usually begin our research on Ol' Faithful, the trusty Internet, right?

The Internet is great for preliminary research on pretty much anything. We don't have to bother someone to get an answer on a particular issue. We can discreetly search for the latest YouTube video of that amazing scuba diving chimpanzee in our cubicle without the boss knowing. Thank God for the "Alt - Tab" feature! Furthermore, we can quickly find relevant research content by using the omnipotent Google.

We all know that the Internet isn't always the most accurate source of information. After all, most of what is on the web is generated by humans. To err is human, right? So we should take all information gathered on the Internet with a grain of salt. What percentage of the online contents that we encounter are accurate? 50 percent? 70 percent? How big of a percentage would we need to feel that we are working with very accurate information? 90 percent sounds pretty good, doesn't it?

Zillow.com is the Internets premier web based home valuation website. Buyers and Sellers come to this website to get estimates (Zestimates) on home values in particular neighborhoods. The estimates are based on tax records and multiple listing service data. It seems to have gotten so popular and seemingly credible that clients will argue with their agent about what a home's fair market value is based on information that they gathered from Zillow.com. These buyers and sellers may have valid arguments IF their data was based on accurate information. The truth is that Zillow has some very misleading information.

Did you know that in Monroe county 31% of these Zestimates are within 5% of the sale price? That means that 69% of Zestimates in Monroe county are at least 5% off from the actual sale price (the true market value indicator). Or even worse, in NY State only 18% of Zestimates are within 5% of the sale price! 25% within 5% on the national level. Where did I get these statistics? Zillow.com! Specifically:

http://www.zillow.com/howto/DataCoverageZestimateAccuracyNY.htm

If this site is so grossly inaccurate, then why do so many buyers and sellers count on it to get information related to buying their largest and most important asset? The most accurate way to calculate a home's value is a comparative market analysis or (CMA) completed by a local real estate professional, and in most cases it's free. If you are a seller, get a CMA completed by a few real estate brokers. This will give you the best representation of market value range. But take caution. There are some unethical tricks that some brokers perform.

Some agents will come in on their CMAs with an artificially high number. As sellers, we all know that we want to get the most money for our homes. Agents will take advantage of this desire and intentionally give you a high price that is not reflective of market value. They do this in order to get you, the home seller to list with them and not the competition (the ones with the more realistic estimates). This practice is so notorious in the real estate community that they have a name for it. It's called "buying the listing." After they get you to sign the contract with them for the inflated price, they beat you up on the price a week or two later to get it down to a more realistic level.

On the opposite side of the scale, there is the agent who will intentionally try to under price your listing. That sounds counter intuitive, doesn't it? If the agent wants to get more commission, wouldn't he want the house to sell for more money? The fact is that getting more money for a client's house involves more marketing; more advertising, greater exposure. Advertising is an expense on our income statement. Some people in our profession believe that expense... any expense is a bad thing; it hurts profits. So some agents will doctor a CMA to come in with an artificially low number, then under price your house so it sells in a couple of days. When it sells that quickly, they collect commission and do not have to advertise their clients property. But do not believe for a second that the agent doesn't believe in advertising, because this style of broker will usually spend the money that he/she saved by not advertising your house and invest it in self promotion advertising.

On another note, the home buyer should rely on their local buyer's agent to run CMAs on homes that may be of interest to them to come up with a reasonable purchase offer price. In any event, just remember that the most accurate real estate information is going to come from a local real estate practitioner, not a website proposing to give accurate data relating to home values. Home values cannot be calculated using tax records, satellite photos, or any other static metric or algorithm. For instance, would you watch a national weather syndicate to get your local up-to-the-minute weather? That's why local news and weather remain in business. Real Estate is a local phenomena, so you must rely on local people for the best information.

http://www.nyhomesgetsold.com

West Side 3rd Quarter Sales Stats

Below you will find the 3rd Quarter 2008 Sales statistics for the West side suburbs. Please note that this is Year over Year information. I believe that assessing performance on a quarterly basis gives a more accurate picture of what is actually going on. Monthly sales statistics for a specific area does not provide enough sampling to get an accurate statistic.

The field "months supply" refers to how many months we have of inventory assuming that no new homes come onto the market for sale. Months supply is based on the most recent quarter sales performance for a given area. Months supply is a good statistic to use in order to gauge where a market is trending. For example, a high months supply usually does not look good for a specific market's home prices. This data does not take account for markets within markets.

For example, it does not account for different price tiers. The $50-$100k market within Hilton may have a two month supply, but the $300-400k market may have a 20 months supply since there is quite a lot of high end construction going on in Hilton at this time. So please be careful when analyzing these numbers so that you do not come to false conclusions.

http://www.nyhomesgetsold.com/

4.5% for a Thirty Year Mortgage?

The smarty pants constituents of the Treasury and the Congress have come up with a new idea aimed at spurring up demand in order to stabilize home prices. They want to offer 4.5% fixed rate thirty year mortgages to home buyers.

If you are a homebuyer, this offer sounds pretty sexy doesn't it? Well what if you are a responsible homeowner who keeps current on your current and has no intention of moving in the next five years? Does this offer sound sexy to you if you do not stand to benefit?

Is it safe to assume that you might even become angry at the fact that your new next door neighbor could be graced with a 4.5% rate and you (the responsible homeowner) is locked into a 6.5% 30 year prison sentence? I know that I would be livid and even pissed... upon first impression.

The general public is greeting this idea with sour disdain and anger. You should see the blogs. People are spitting venom. Why should responsible homeowners who are not buying a house in the near future (the majority of Americans) be penalized and left out in the cold? I understand the objections, but let me offer an idea on how you will benefit if this measure is passed by the Treasury.

Quite simply, those who do not stand to benefit directly from a bought down 4.5% interest rate, do stand to benefit indirectly. For example, if there are more buyers in your real estate market because of this artificially low rate, don't you suppose that it could positively affect your homes value? Now although you do not get the sweet deal on the mortgage directly, you do have a stake in this, afterall you are a homeowner!

Another way that you stand to benefit is quite simply microeconomic effects. Are you generally better off if the economy in your town is doing well? Of course. Did you know that when someone buys a new home, 17% to 20% of the sold homes value is spent in the first year by the new homeowners. Hard to believe, right? When you start to break it down, it makes sense. First, you have the real estate companies commission, then mortgage fees, appraisals, inspections, new furniture, moving companies, homeowners insurance, the new dog, etc. This starts to add up fast and it greatly benefits the economy.

Now I would like to state my disagreement as to how the Treasury plans to pull this off. Paulson, Bernanke, and all the other muckity mucks are astounded at the fact that 10 year treasury bills have a yield of 2.65 percent which is really cheap. This allows the Treasury to borrow money at 2.65% and then lend it out at 4.5 %, therefore capturing a handsome profit. Sounds great, doesn't it? This idea scares the hell out of me.

First of all, what happens when interest rates go up during the holding period of these discounted debt instruments? Lets take a savings bond for example. Lets say you buy a $100 30 year savings bond at a 4.5% interest rate in December of 2008. You are very happy because 4.5% is a great rate to have on a government insured investment. Let's fast forward to July of 2011. Interest rates on 30 year savings bonds are now 8%. How does this effect the value of your hypothetical savings bond? It literally pulverizes its value. You still get the same interest payment, however the face value of the investment greatly diminishes. If you hold it for the entire 30 year period, you will not be materially affected for the most part. However, what if you need to liquidate it to honor a short term obligation, or any obligation at all?

Do you really think the Treasury will hold these discounted mortgages for the entire 30 period? My sources point to "NO." In light of the aforementioned, this would leave the Treasury exposed to unwarranted risk. Interest rates will go up dramatically when the economy recovers. I think this would be opening Pandora's box. Let me offer a different approach.

Instead of actually owning the mortgages, let the government subsidize the lower rate to the lending institution. Let the government essentially buy down the rate to the artificially low level. This approach would be very similar to the way corn subsidies are delivered to farmers in the US. For example, interest rates on conventional 30 year fixed mortgages are 5.37%. JP Morgan Chase funds the mortgage and receives 5.37% of the principal balance over 30 years. The homeowner involved in this mortgage pays 4.5% a year over thirty years. So who fills the 0.87% gap? Uncle Sam does! Considering that the Median Home Sale price in the US is $191,000, this would equate to a $1,661.7 subsidy per year, or $49,851 over the life of the loan. In 2007 there were about 5 million homes sold. So to sponsor a project such as this, it would cost the government approximately $250 billion dollars over the entire life of the loans. $250 billion is the cost involved if every single one of these 5 million buyers applied for this mortgage, got it, and held the house, and did not refinance for 30 years. The probability of this happening is slim to none. On average people move every five years or so.

Let me know your feedback on this opinion piece!

http://www.nyhomesgetsold.com/

3rd Quarter E. Monroe County Real Estate Sales Statistics

3rd Quarter Sales Statistics for Eastern Monroe County

Well, its that time of the year where we compile our quarter over quarter sales statistics for Q3. As you dissect these stats, you will notice that the Greater Rochester Area has had a fairly strong year in Real Estate, especially when you compare it to other markets on the national stage. The chart below illustrates just this. This chart compares our local market to the Standard and Poor’s Case-Shiller Home Price Index for all months dating back to January of 2007. Keep in mind that this is a month-to-month accumulation of percent values. This expresses the value deviation away from 0%. Furthermore, I would like to point out to you that by no means should you interpret this data as applying to your own personal home. Average home sale price in our area has actually increased approximately 5.6% since Jan. 2007. On the other hand, the largest twenty real estate markets across the US have witnessed a 22.3% decrease in value on average.

Not too shabby, eh? We have a pretty boring real estate market here in Upstate NY. However, boring isn’t always bad, as you can see here. Now, onto the main point of this article: Q3 Real Estate Sales Statistics for Eastern Monroe county suburbs. Before you start looking at these numbers, two things should be taken into mind:

1.) These are median home sale prices for Quarter 3 2007 and Quarter 3 2008. If you live in Pittsford and see the -20% in bold red letters, do not freak out. This does not mean that home prices are plummeting across the board. It means that the median of what sold in these two periods had a difference of 20%. It means that homebuyers bought less expensive homes in Q3 ’08 than they did in Q3 ‘07, capiche?

2.) In the table below, you will see the term Months Supply. Months Supply is defined as number of single-family homes sold per month in Q3 below number of single-family homes active on the market right now. This statistic is a good gauge as to how hot a given market is. A very low months supply indicates a shortage of inventory as it compares to its peers. Markets with a low months supply will usually tend to get offers closer to asking price. Please keep in mind that months supply is always a bit skewed for Q3 every year. The number of active properties on the market decreases substantially around this time of the year because of the Holidays.

If you compile all of these together, you have about a 1% decrease in median home sale price in these townships. In the grand scheme of things, prices have been fairly flat.










If you prefer a more visual representation of this data, I have included a chart below.


If you were to take a pulse of the real estate market right now in Rochester, you would find that there is a very large shortage of inventory. It seems as though uncertainty about the real estate market and the economy has kept many sellers from putting their home on the market. As a result, many brokers in my office including myself have found that buyers are having a difficult time finding suitable housing because there has not been a steady flow of inventory into the marketplace over the past few months. Inventory is so low in fact that I have resulted in searching for “For Sale by Owner” properties for my buyer clientele. If you compare the months supply of Q3 to last years market, the months supply was 9 months supply to 10 months supply on average. It is my opinion that we have some very serious pent up demand at this moment in time.

Q3 sales statistics for Western Monroe county suburbs will be released in the near future. Furthermore, if I have not included an analysis for your town or neighborhood, please feel free to contact us. We would be happy to perform a free custom market analysis for your home or neighborhood.

http://www.nyhomesgetsold.com

Stabilizing Real Estate Values Through Loan Mod

Of the $700 billion dollars included in the bailout package, only $50 billion dollars have been proposed to help homeowners facing foreclosure. On the other hand, the US Treasury wrote a $154 billion check to AIG. Although AIG is a very large company, is it larger and more influential than the American people as a whole?

AIG is just one company involved in this financial turmoil that we have found ourselves in. The way to stabilize the financial markets and loosen up credit markets is to stabilize the value of the assets that are in turmoil. Those assets happen to be mortgage-backed securities. What asset is securitized by a conventional mortgage? A house: a tangible thing that has value in use and value in exchange. If plummeting home prices are the root of the problem, why are there not more funds dedicated to stabilizing home prices? Sliding prices are the reason why we have foreclosures rampant. Many people are walking away from their homes because the mortgage amount on their home, in some cases, may be two times what the house is actually worth. When they walk away, the lender forecloses on the collateralized asset and puts it on the market for sale for the current value or less. This phenomenon has built an unprecedented balloon in inventory that further depresses prices and causes more homeowners to walk away.

In order to stabilize home prices, we need to stimulate demand and discourage increase in supply. Decreasing inventory will involve staving off foreclosures. This can be achieved through facilitating loan modifications. Essentially, a loan modification allows a homeowner who wishes to stay in their home to recast their existing mortgage balance to reflect the current market value of their home. Although the bank loses money, it avoids a much worse outcome: foreclosure. The latter outcome can cost the bank tens of thousands of dollars in taxes, legal fees, and lost interest income. In fact, in normal market conditions, the loss absorbed by the bank for a foreclosure is between 30% and 40% of the principal value. After all is said and done, the bank still has to liquidate the house at the current depressed market value. Loan mod is proven to be the less expensive alternative. As an incentive for facilitating the loan mod, the Treasury guarantees the fulfillment of the mortgage.

Having these modified loans guaranteed by the faith of the US Treasury will provide the banks with more liquidity. In other words, a Treasury backed mortgage security is much easier to sell on the secondary market than one that is not. For instance, if a financial institution needs to liquidate a mortgage backed asset to satisfy a short-term liability, it will be able to. This, of course, is only effective at stemming foreclosure if the Federal government dedicates more than it already has. What has to be encouraged on the banking side is confidence, not writing blank checks.

One may object, “How will loan modifications work if real estate values keep dropping? In other words, if real estate values drop even more after a modification, won’t the homeowner still be tempted to walk away?” This is a valid objection. However, recent statistics suggest that we are near a bottom in real estate values nationwide. According to an article in Smart Money:

“In October 2005, near the peak of the boom, the median sales price for a U.S. home reached 7.3 times per capita income; by this May it had fallen to 5.7, in line with historical norms.” Smart Money 10/17/08

Assuming that we are near a bottom, we need to do what we can to avoid a devastating overcorrection.

Now that I have mentioned the supply side, I will discuss methods of stimulating demand. One resource that must be tapped in this regard is the first time homebuyer or the homebuyer who does not own a home. This class of buyers will better help sop up excess inventory than other homebuyer classifications. After all, people moving from one house to another cancel out the supply demand dynamic in this scenario. We must encourage new buyers to enter this market. Recently, FHA revised their minimum down payment from 2.25% up to 3.5% effective January 2009. Although a 1.25% increase does not seem like much to the average person, it could mean the difference between homeownership and years of continued renting for a first time homebuyer who is sufficient on income but light on cash. Furthermore, even SONYMA, one of the best programs for first time homebuyers in NY has bumped their interest rates from 6% up to 7% and have cut their closing cost assistance in half. Do these actions positively affect the demand side of our distressed real estate market?

First time homebuyers and the like are the lifeblood of a healthy real estate market. The first timer buys a house from a family that usually ends up upgrading to a more expensive home, so on and so forth. In other words, this class of consumer creates the tide that raises all ships. Additionally, the average homebuyer in this cascading chain ends up spending money on many products and services related to the move. If fact, statistics suggest between 17% and 20% of the equivalent home value is spent on these products and services. Do you think that this may help the overall economy too? We are in a CONSUMER LED RECESSION, aren’t we? If this is correct, why isn’t there more being done to reflect their importance to stabilizing real estate values? Yes, a $7500 tax incentive is helpful, but if we are to stimulate demand more effectively, we need to have a multifaceted approach. Instead of writing checks to money center banks so that they can afford to buy their competitors, maybe the Treasury should buy down interest rates for first time homebuyers and renters to encourage them to come into the marketplace.



Please let me know what you, the reader, thinks about this issue especially how it might pertain to real estate in Rochester, NY.



http://www.nyhomesgetsold.com/

$7500 Tax Credit - "A Big Sham?"

It seems as though a lot of people have been poo pooing this tax credit after the media and bloggers alike found out that this was not a tax credit at all, but rather an interest free loan. Why would we take advantage of a tax credit, if in fact we have to pay these supposed savings back in full? It’s not savings if we have to pay it back, right? The government, real estate agents, and mortgage brokers have been flooding us with misleading propaganda about this tax credit for the past several months. Some have gone so far as to advertise properties with offers such as this: “Call for more information about $7500 in free closing cost assistance!” Interested home buyers call only to find out that, “Oh, its that stupid tax credit that every mortgage and real estate scum bag seems to be raving about!”

At this time, many members of the buying public seem to be pretty disenfranchised about this measure set by congress to spur up demand in the housing market. Are there any things that are positive about this tax credit even though you have to pay it back over 15 years at $500 a year? Of course! In this article, I will attempt to illustrate some positive ways in which you could leverage this opportunity to positively affect your finances.

Option #1 – INVEST IT!


Do you have a financial goal that is at least 10 years off? As a first time homebuyer or someone who has not owned a home in the past 3 years (those who qualify), I can imagine that you do! For instance: A child’s education, a down payment on a vacation home, retirement, etc. Take the entire balance of $7500 and invest it in an S&P 500 index fund that grows at a modest 10% a year on average. In 2010, start paying back the $500 dollars a year to Uncle Sam and let the rest grow. In 15 years, what will you have? You will have paid back Uncle Sam, and you will have $18,576.06 more than you would have had if there were no tax credit in the first place.

-Example of $7500 investment, paying out $500 a year after the second year. Assumes a 10% appreciation per year.



Option #2 – Go Shopping!

I bet you got excited when I mentioned shopping, didn’t you? Unfortunately, I did not mean shopping for just anything. Use some finances which would have otherwise gone to Uncle Sam this year and buy some high quality furniture and decorations for your new home! Ever heard that staging sells your home? If you put some money towards buying some timeless furnishings, it could definitely help when it comes to sell your home in the future. Besides, if you are a first time home buyer, your first house isn’t always your last. Probability dictates that you will most likely put your new house up for sale within 5 years or so.
A well decorated home usually sells faster and for more money, at least this is the case with real estate in Rochester, NY. The best part is that all that money that you spend on furniture and decorations doesn’t go to waste. You get to take those items with you onto your next home. After all, they are personal property! Don’t have a keen eye for decorating? Get in touch with a professional stager. One that I personally recommend is http://www.stagingsellsyourhome.com/ . No sense decorating your new home with ugly things that could hinder your eventual sale. A second opinion could help if you do not have a passion for decorating. Now you will have more enjoyment of your living space and it could pay off big time in the future!

Option #3 – Buy Life Insurance!

This is probably the last option that you wanted to hear, but it may be the smartest. “Life insurance? I don’t have any kids, I’m not married, so why the heck would I need life insurance?” As an agent who specializes in working with first time homebuyers, I hear this a lot. My retort to this objection is, “Do you plan on getting married at any point in your life? Do you plan on having kids at some point in your life?” If the answer is yes, then you will inevitably buy a life insurance policy at some point, that is, if you are a responsible human being. So why not contribute to a policy when you are young? When it’s cheap? In addition, a comprehensive policy will build substantial value over time. If you do not understand the ins and outs of life insurance, be responsible and educate yourself; call your local agent.

If you have any questions, suggestions, or tips concerning this $7500 tax credit, please feel free to contact me at mattdrouin@nothnagle.com

For recent articles, visit http://www.nyhomesgetsold.com/community