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How home value delusions are causing a pricing pickle

Stats show why going FSBO isn't beneficial to homeowners

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As prices rise and demand improves, some sellers turn their thoughts to going FSBO (for sale by owner) or using a fee-for-service broker.

There’s nothing wrong with saving a buck. But chances are these owners think they already know what their houses are worth and what price they get.

What they need is a reality check from a seasoned professional, even if they don’t like what they will hear.

The crisis in pricing grows worse as prices rise

There is a serious crisis today in the accuracy of sellers’ valuations and the success of their efforts at pricing. The crisis is growing worse as prices rise and sellers’ expectations rise even higher. Recent research is sounding an alarm — and sellers should take care.

A new study scheduled to publish in September 2015 in the Journal of Housing Economics found that homeowners overprice their homes by an average of 8 percent.

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Those who bought during times of appreciating prices, such as the 2004-2006 housing boom, tend to overestimate their value even more — as high as 12 percent. Owners who bought during the boom are inflating the value of their homes an average of $26,328 on a median-priced existing home ($219,400) when they sell.

According to the economists who wrote the report: “Our findings provide some explanation for the difficult situation many homeowners are in today. The tendency to overestimate capital gains makes homeowners more vulnerable to adverse shocks than they would otherwise be.

“Individuals who buy during a runup in home prices may be particularly prone to unrealistically optimistic expectations regarding the rate of home price appreciation, making those cohorts particularly vulnerable to declining property values and tighter credit markets.”

The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2014 found that income levels are skewing homeowners’ perceptions of home prices.

Only 28 percent of homeowners making under $40,000 per year expect rising home values in their neighborhood to increase, whereas 51 percent of those making over $100,000 expect values to appreciate.

Quicken Loans published an index that compared appraised values with the values homeowners supply on mortgage applications. The index found that even though prices are rising this spring, homeowners’ expectations are rising even higher. In April, appraised values fell below homeowners’ expectations for the third straight month.

Owner’ flawed expectations cause refis to fail

“While it is not surprising to most appraisers that homeowners are overestimating their home’s value on a national average, we should always make note of direction the trend is heading to help set expectations for homebuyers and those looking to refinance,” said Quicken Loans Chief Economist Bob Walters.

“There is nothing more disappointing to a homeowner than learning that the value of their home is less than they expected.”

Overestimating the value of their homes when, in fact, they lacked adequate equity to refinance was surely a primary reason that only 50.9 percent of homeowners’ refi applications were approved last year, compared with 63.3 percent of purchase mortgage applications — even though underwriting standards on purchase loans are tougher.

Owners make refinancing decisions alone, and often sellers decide whether to sell and when to sell before they have retained a professional. Today, those decisions are complicated by the large numbers of owners who still don’t have enough equity to either refinance or sell.

According to NAR’s 2014 Profile of Home Buyers and Sellers, 17 percent of recent sellers had to delay or stall the sale of their home because the value of their home was worth less than their mortgage.

For more than a decade, NAR has reported that FSBOs typically have lower median selling prices and spend more time on market. In 2014, the difference was $208,700 compared with $235,000 — a 13 percent higher sales price — and FSBOs take 19 more days to sell.

Professional real estate agents bring many skills to the task of selling a home, but convincing sellers to price it right so that it sells might be the most valuable one. An expert agent providing counsel to the seller on pricing and backing up those recommendations with hard data in a comparative market analysis (CMA) or broker’s price opinion (BPO) might be the best deal a seller will ever get — and you should make sure they are aware of that.

Steve Cook is editor and co-publisher of Real Estate Economy Watch and provides communications consulting services to leading real estate organizations. Visit him on LinkedIn and Facebook.

Email Steve Cook.