Zestimate gets fresh competition

Kenneth R. Harney on Dec 11, 2015

WASHINGTON – Can a machine – even one loaded with sophisticated algorithms, cloud-computing technology and real-estate market data – accurately estimate the value of your home?

No way, you might say, it takes trained, professional appraisers to inspect and value houses, and even the best of them don’t always get it right. But real estate and technology entrepreneurs strongly believe that relatively accurate automated estimations of value are achievable, and they have been working for years to create systems that do just that. You’ve probably heard of or used the best known – and most controversial – version to date- Zillow’s “Zestimate” model. It allows you to go online, enter an address and get a nearly instantaneous valuation, along with property data such as square footage, numbers of bedrooms, baths, lot size and the like. It’s available for millions of houses across the country, whether they are on the market for sale or not.

But Zestimates have provoked criticism by owners, sellers and realty agents who are upset at inaccuracies in value conclusions, property data and analysis of neighborhood price trends. Zillow itself acknowledges the problem, disclosing on its website that the “median error rate” nationwide is substantial – 7.9 percent. Error rates are measured by the difference between what the automated system says is the estimated value and the subsequent selling price of the property. Median Zestimate error rates in some exurban markets, however, range much higher – 10 percent to 20 percent and worse.

Now there’s a new, noteworthy competitor to Zestimates. Last week, national real estate brokerage Redfin rolled out its own proprietary model, claiming a median error rate of just 1.96 percent on homes listed for sale and 6.23 percent for all other houses. Dubbed the “Redfin Estimate,” it’s available free on 40 million homes in 35 major metropolitan markets. Redfin CEO Glenn Kelman says his company’s model not only offers the “lowest published error rate” available, but taps into “a treasure trove of data” provided directly by multiple listing services (MLSs) around the country and uses advanced cloud-computing power.

“This gives Redfin information about homes that non-brokerage real estate websites don’t have, like whether a home has a water view or is located on a busy street.”

The Redfin model also employs a weighting system keyed to market preferences for different home features and locations. For example, Kelman said, a waterfront location in the Seattle area may be much more highly valued than in other markets

As you might suspect, Redfin isn’t providing free online estimates purely out of a desire to further the general public’s knowledge. It’s in the business of representing buyers and sellers, and you can’t miss the tie-ins that accompany your Redfin Estimate. When you visit its site (http-//www.redfin.com/redfin-estimate) and log in an address, it displays not only the home photo and value, but has multiple links to agents “who can discuss and refine estimates … as well as list the home for sale.” It’s all voluntary of course – no obligation – but you get the point.

Like Zillow, Redfin discloses median error rates. The lowest rates for estimates on active listings are in Colorado (1.41 percent), Virginia (1.58 percent), Washington state (1.65 percent) and Arizona (1.67 percent). In metropolitan Washington D.C., it’s 1.95 percent. Valuation error rates on houses not listed for sale run considerably higher, such as 10.67 percent in West Virginia, 8.46 percent in Pennsylvania and 8.2 percent in Florida.

So what does Zillow think about this new competition from Redfin? I spoke with Stan Humphries, chief economist and chief analytics officer, and he didn’t mince words. Redfin’s claims of superiority may be “great marketing but there’s not much reality to it,” he said. Zestimates are available on 100 million homes, more than twice as large a database as Redfin’s, and its median error rate covers both listed and non-listed houses. Non-listed and non-urban homes inevitably are tougher to value, but Redfin limits its exposure by focusing on just 35 metropolitan areas. He scoffed at Redfin’s trumpeting of direct pipelines into MLS data and its use of cloud computing. Zillow uses listing information from MLSs and directly from brokers, and has employed cloud computing for years, said Humphries.

So what to make of this emerging spat between real estate valuation competitors? How about this- Try both systems on one or more houses – maybe your own and one or more you know well. See which performs better. It won’t cost you a cent to do test drives.

Are baby boomers causing shortage in real-estate listings?

Kenneth R. Harney on Dec 4, 2015

By KENNETH R. HARNEY

WASHINGTON – They rocked at Woodstock, marched in protest on campus, distrusted authority, and then as adults, took out mortgages and bought lots of real estate. But now, say some economists, baby boomers aren’t selling their houses as earlier generations did – they’re not downsizing fast enough as they approach and pass traditional retirement ages – and that’s contributing to inventory shortages of homes for sale as well as rising prices.

Boomers are part of a “clogging up [of] the whole chain of home sales,” Sean Becketti, chief economist of giant mortgage investor Freddie Mac, told me last week. “They appear to be staying in the family home longer than previous generations,” Becketti wrote in a new outlook report, “and the imbalance between housing demand and supply continues to boost prices.”

Of course boomers’ behavior has had outsized effects on the national economy for decades. In real estate, their footprint is enormous. Becketti cites the Federal Reserve’s most recent Survey of Consumer Finances (2013), which estimated that households aged 55 and older controlled two-thirds of all home equity. One federal estimate puts the aggregate value of their houses at close to $8 trillion.

In past generations, once the kids moved out, empty nesters either began to downsize by purchasing smaller single-family houses or they rented apartments. Boomers don’t seem to be in a rush to do either. In a report prepared this summer, Fannie Mae’s Patrick Simmons, an economics and strategic research group director, said that there’s no statistical evidence that boomers are reducing their single-family occupancy rate, trading down to homes with fewer rooms, or pushing up demand for apartments. Between 2010 and 2013, he said, “the number of boomer apartment renters did not change significantly,” but the number of millennial apartment dwellers increased by an average of nearly half a million a year.

So what’s the big deal? Why the concern about boomers staying put longer than expected? Everybody’s heard that 60 is the new 50 and that boomers are working longer than their parents and grandparents. Who really cares if they’re hanging on to their houses?

Here’s who- People who sell, build and finance new and existing houses care – it’s their bread and butter – as do potential buyers squeezed by rising home prices on one hand and rising rents on the other. According to Realtor.com, median list prices as of October were up 6 percent year over year. Inventories of houses listed for sale nationwide were down by 3 percent during the same period.

Three percent doesn’t sound like much. But check out the shortages and price increases in a few major markets-

- Seattle listings as of October were down 19.1 percent while median list prices jumped by 10.3 percent.

- San Diego listings dropped by 16.4 percent; median prices rose by 13 percent.

- Charlotte listings declined by 9.8 percent; median prices were up by 12.8 percent.

- Salt Lake City listings were down by 23.4 percent; prices were up by 10.2 percent.

No one’s blaming this on boomers alone. Economists say boomers’ slower than expected rate of downsizing and selling is playing a contributing role to supply, demand and pricing imbalances in local markets – not creating them.

Lawrence Yun, chief economist for the National Association of Realtors, says there are multiple factors at work here, especially the lingering effects of the housing bust and the Great Recession. Homeowners of all ages lost billions of dollars of equity wealth during 2008-2011, he argues, and many owners are still rebuilding sufficient equity to allow them to sell and move without having to bring money to the settlement. Boomers are a part of that group and some have been forced to postpone their moves and sales.

David Crowe, chief economist for the National Association of Home Builders, points to a feedback loop effect that is discouraging some boomers from listing and selling- Fewer listings mean more competition for a limited supply of homes in hot markets. That competition pushes up prices for everybody, including boomers who might like to downsize but can’t find a replacement home that’s both affordable and acceptable. So they wait.

But changes are coming. Fannie Mae’s Simmons observes that the boomer logjam is a temporary issue. “Boomers will not inhabit this vast inventory (32 million homes) forever,” and when their circumstances change – which they inevitably will with age – watch out. “Their actions will reverberate through the housing market .”

FHA reforms don’t rescue condo buyers

Kenneth R. Harney on Nov 20, 2015

WASHINGTON – If you’re a first-time buyer with a moderate income and not much cash for a down payment on a condo, the availability of Federal Housing Administration (FHA) financing is a big deal. Not only do you need just a 3.5-percent down payment, but FHA is also far more flexible on credit compared with other financing sources. With a sub-par FICO score and a high debt-to-income ratio, banks and big investors such as Fannie Mae don’t want to know you. FHA welcomes you with open arms.

The challenge for condo purchasers in the past several years, however, has been finding a condo project that is certified by FHA as qualified for mortgages on individual units. Because of controversial eligibility rules imposed by the agency in recent years, the number of certified projects has plunged, with barely 20 percent of previously eligible condo communities now able to offer FHA loans on units, according to real-estate industry estimates.

As a result, FHA’s once pivotal role in helping first-time buyers and others purchase moderate-cost condos has shrunk from 80,000 and 90,000 mortgages per year during the past decade and a half to 22,800 last year. Through August of this year, condos represented barely 2.8 percent of total FHA loan volume. The agency prohibits “spot loans” made on single units in a project; if the whole community isn’t certified, nobody gets FHA financing, including existing residents who need to refinance their loans or obtain a reverse mortgage.

All of this has provoked bipartisan criticism on Capitol Hill, particularly among advocates for FHA’s traditional customer base – minority buyers, first-timers and the non-wealthy. Faced with a congressional legislative proposal mandating reforms of its condo rules, last week FHA responded. At a convention of the National Association of Realtors in San Diego, FHA’s top official, Edward L. Golding, said the agency is simplifying some of its condo certification procedures, easing restrictions on condo association insurance and making a technical change to its requirements on non-occupant residency in projects. The president of NAR, C`hris Polychron, called the changes “a win and a tremendous first step in the right direction.”

But will they really matter to you as a potential buyer searching for an eligible condo project or a unit owner looking to sell or refinance? Maybe. But the reforms FHA outlined don’t address the key reasons why so many condo associations no longer are certified and why so many first-time buyers and minorities have been shut out.

In fact, one national expert on the FHA condo program, Christopher L. Gardner, managing member of consulting firm FHA Pros, which assists homeowner associations through the thicket of certification rules, said the changes amount to “a lot of sizzle and little steak.” Dawn Bauman, a senior vice president for the Community Associations Institute, which represents more than 33,500 condo and homeowner associations and managers nationwide, said that while some of the changes look “helpful,” there’s “a lot of hype” surrounding the announcement and “a lot more work to do.”

Condo consultant Natalie Stewart, president of FHA Review in Orange County, California, told me that given the modest scope of the changes, “I’m shocked that they bothered to come out with this at all.”

What’s not addressed that would really impact individual buyers and sellers quickly-

- Spot loans. In past years, FHA permitted lenders to make loans on single units in non-certified communities with certain restrictions, but no longer. Since the vast majority of previously eligible condo projects around the country have opted out of the FHA program, the modest simplifications to the certification process likely won’t be enough to attract many of them back. Last week’s announcement did not even mention spot loans.

- Transfer fee restrictions. In some parts of the country, condo associations collect a small fee – a contribution toward capital expenses and repairs of community facilities – whenever a unit sells. FHA objects to these as restrictions on the free transferability of properties, and refuses to approve them. As a consequence, some large associations – one in southern California with 7,000 homes – no longer are eligible for FHA financing. The new changes are silent on the subject.

- Rigid rules on budgets, reserve, lease approvals and limits on commercial space.

Bottom line- If you’re counting on FHA to help finance your condo purchase, it’s possible the new changes will convince more associations to seek eligibility. But as consultant Gardner said, there’s more sizzle here than red meat.

Appraisal ‘adjustments’ can cause trouble

Kenneth R. Harney on Nov 6, 2015

WASHINGTON – Whether you’re a home buyer, seller or looking to refinance, you probably know the crucial importance of appraisals- They can limit the amount of mortgage money you’re allowed to borrow, delay your closing or even totally mess up what you thought was a done deal.

According to survey research provided by the National Association of Realtors, more than one out of five home real estate contracts gets delayed before closing because of disagreements or problems connected with the appraisal. Eleven percent of sales contracts that explode before final signing involve appraisal issues.

That’s a lot. Say you’ve found a buyer for your house who’ll pay you $400,000. Suddenly an appraiser says it’s really worth $365,000, based on analysis of “comparable” properties sold recently in the area. Now your buyer balks and threatens to pull the plug if you don’t slash the price. You and your listing agent challenge the appraisal and demand to see what sort of comparable sales and other calculations were used to come up with a value $35,000 below what a buyer was prepared to pay.

Where to look? A massive, first of its kind study of 1.3 million individual appraisal reports from 2012 through this year conducted by real estate analytics firm CoreLogic offers a suggestion- In the so-called “adjustments” in appraisals that involve relatively subjective estimations – the appraiser’s opinions on the overall “quality” level of your house, its “condition,” “location” and “view” – rather than more objectively determinable items such as living space square footage, lot size, numbers of baths and bedrooms, etc.

The adjustments are made to the recorded sales prices of the houses the appraiser chooses as “comparables” to get a more accurate sense of the value of the house being sold or refinanced. Say your home has three bedrooms but a nearly identical house selected as a comparable has four. The appraiser is supposed to determine the market value of that extra bedroom and make an appropriate adjustment to the value of your house.

Adjustments are made in 99.8 percent of all appraisals, according to the CoreLogic study. The most frequent adjustments involve objective features of houses – living area, rooms, car storage, porch and deck were all adjusted in more than 50 percent of the 1.3 million appraisals, according to CoreLogic. As a general rule, the adjustments on objective features were not large in dollar terms. For example, “room” adjustments were made in nearly three quarters of all appraisals but averaged only $2,246, and did not affect the final appraised value dramatically.

Adjustments involving more subjective matters – the overall “quality” or “condition” of the house – were less common but typically triggered much bigger dollar changes. The average “quality” rating adjustment was nearly $15,000, which is more than enough to complicate a home sale. But some subjective adjustments on “view” or “location” in high cost homes ran into the hundreds of thousands or even millions of dollars.

Jon Wierks, senior director of decision analytics for CoreLogic told me in an interview that items such as “condition,” view” and “location” can be “super subjective” at any price level and especially challenging for appraisers new to the field or with limited knowledge of local market trends. In one adjustment in the appraisal study, he said, a property in a neighborhood of expensive homes got a $3 million downward adjustment solely on “view.” In other cases, researchers saw adjustments of $4 million and $15 million on location issues. Did these adjustments set off battles between sellers and buyers? The CoreLogic study didn’t get into that but it wouldn’t be surprising.

Gary Crabtree, an appraiser in Bakersfield, California, told me he recently has seen “view” adjustments ranging from $100,000 to $140,000 within a golf course community and he made a $150,000 adjustment on a large luxury home because of its unfavorable location. The most accurate adjustments are based on hard local market statistical data, Crabtree says, but when they are not, valuations can end up distorted, prompting delays or blowups.

Research released last week by Platinum Data Solutions, which reviewed 300,000 appraisals made between July and September, found that fully 39 percent of “quality” or “condition” ratings conflicted with previous ratings on the same property. That inevitably invites controversy.

Bottom line- If your appraisal doesn’t square with the contract or threatens the deal, take a hard look at the “adjustments” made inside the appraisal on subjective factors such as condition and quality.

Critics hit FHA on condo financing

Kenneth R. Harney on Oct 30, 2015

Democrats and Republicans on Capitol Hill don’t agree on much lately. But a bipartisan coalition of 56 House members has come together to file a protest about a housing issue that’s been festering since 2011- the federal government’s dramatically diminished role in helping buyers finance condominiums.

In a letter to Housing and Urban Development Secretary Julian Castro, the congress members complained that the Federal Housing Administration has imposed “significant restrictions” on condo financing, despite the fact that condo units often are “the most affordable homeownership options for first-time buyers, small families, urban and older Americans.” A HUD spokeswoman said the department is reviewing the letter but had no immediate response.

The House members’ condo complaints come in the wake of sharp criticism from consumers, condo association boards, builders and real estate agents over the Obama administration’s failure to maintain the FHA’s once prominent role in helping to finance condos, especially in the starter-home, moderate price ranges. During the past decade and a half, low down payment FHA-insured mortgages sometimes financed 80,000 to 90,000 condo purchases annually. But since 2011, those numbers have been plummeting. During 2014, they totaled just 22,800 loans. Through August of this year, condos have accounted for just 2.8 percent of FHA loan volume.

As the result of onerous new “recertification” procedures, which require entire condo developments to pass prescribed standards or be banned from FHA lending on any individual units, only about 20 percent of previously eligible developments can now use FHA financing. This reduced number, in turn, represents barely 10 percent of the total market for condominiums, according to congressional estimates. The agency has also imposed a variety of other requirements – tight limits on the percentage of rental units in any one project, caps on the amount of commercial space a project can have, restrictions on fees that many condo associations depend upon to support their activities – that have frustrated buyers and sellers across the country.

In one large condo development in Orange County, the condo association’s inability to deal with FHA’s rules has knocked 7,000 units out of eligibility for favorable low down payment financing, according to Rita Tayenaka, president of the Orange County Association of Realtors. The ineligibility not only makes it impossible for would-be purchasers to use an FHA loan to buy a condo unit in the development but also reduces the ability of current owners to refinance or to sell. Condo owners who are seniors have been cut off from the dominant source of reverse mortgage money – FHA’s home equity conversion program, which provides more than nine out of 10 reverse mortgages nationwide, according to lending industry estimates.

“It’s been very frustrating trying to work with FHA” to solve these issues, Tayenaka said in an interview. “Nothing happens.”

Seth Task, a real estate broker with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says FHA problems with condos are “a daily occurrence.” He cited the recent example of a buyer who was pre-approved to purchase a $145,000 condo unit with an FHA loan. But because the condo development was no longer certified under FHA rules, the buyer could not obtain a mortgage. Weeks later, the unit sold to an all-cash buyer for $139,000 – a $6,000 loss in value for the seller.

FHA’s current rules are “not fair to millennial buyers” who need low down payments and favorable credit underwriting, said Task, and they’re “not fair to sellers.”

The condo drought at FHA is beginning to stimulate more than congressional letters of protest. Last week a House subcommittee heard testimony on a bill (H.R. 3700) that would mandate many of the changes critics have been demanding.

HUD officials in earlier years have explained that the tightening of rules governing condo financing were prompted by losses FHA suffered in connection with fraudulent condo mortgages originated in Florida during and immediately after the housing crisis in 2009-2010. Yet the agency’s own data now show that FHA’s overall portfolio of insured condos has been performing 22 percent better – that is, producing fewer defaults and losses – than the agency’s regular single family loans, according to Brian Chappelle, a principal at consulting firm Potomac Partners and a former official at FHA.

“Their mission is affordable housing for people who need it,” said Task. “But FHA has set the (condo) system up to fail” – and it’s doing precisely that.