A second quarter 2010 data report by Zillow.com claims there is a noteworthy decrease in the national percentage of underwater homeowners. Currently, 21.5% of homes are underwater — down from 23.3% in the first quarter of 2010 and 23% from the previous year.
The data service attributes the decreasing percentage of underwater homeowners to rising prices triggered by state and federal tax credits, along with an increase in the number of foreclosures.
first tuesday take: The so-called “drop” in the number of underwater homes this quarter is dangerously misleading. A more in-depth analysis of the calculation process used to obtain these numbers reveals that the home valuation index in this case is almost certainly based on the median prices of all homes in a designated area.
Median numbers tell us nothing. Because there is an increase of high-tier property sales at ever lower prices, these high-tier transactions are creating the illusion of increased prices across the board. The median price rises when the weight of these larger sales tips the scale upwards.
The median number sits in the dead center of the actual recorded data and reflects a phantom price that cannot be assigned to any single home. Because the percentages cited by Zillow.com are based on median numbers, the decrease in underwater homeowners they reflect is most likely inaccurate.
It is vital for agents and brokers to carefully research the statistics they use to form their opinions of the market which they disseminate to clients. Many media resources rely heavily on these irrelevant median price data points to push whatever policy or opinion they see fit.
All sources have a bias one way or another, but finding accurate information that reflects the unique characteristics of the local market will provide for the most relevant, educated analysis (as all informed agents will know, real estate is local).
Avoid median numbers; they only serve to cloud statistics and arrive at shaky conclusions. California agents should keep in mind local geography and diversity set this market apart from the national forecast. Similarly, California’s uniquely large disparity between high- and low-tier properties is completely glossed over by the reductionist median figure. It would be more prudent to study trends in local neighborhoods, compare different price tiers and evaluate similar homes over the past couple years to discover whether or not data reports are useful. [For more information regarding median price figures, see the May 2010 first tuesday article, Looking through the window towards recover: a real estate paradigm shift — Part II.]
Agents and brokers should know that a myriad of underwater homeowners still remain in their homes and continue fecklessly paying down their mortgages. There is still a great need for real estate professionals to share their expertise with those who are unfamiliar with their options in this situation. [For more information on the strategic default options available to a negative equity homeowner, see the March 2010 first tuesday article, The underwater homeowner, his future and his agent: a balance sheet reality check Part I and Part II.]
Re: “Fewer U.S. homeowners underwater as Calif. home prices rise” from Bloomberg
Perhaps the doubling of REO held by freddie and fannie since last year had something to do with it, since those homes are no longer in the calculation and would represent a significant reduction of negative equity?
Katie C from Zillow stated: “To calculate negative equity, we look at the amount of loan on an individual home and compare that to the current value of the home (we do this for single-family homes with mortgages).”
The flaw is this statement is that assumes that the automated evaluation model that you employ to arrive at the current value of the home is accurate. I assume you are using the zestimate value that you employ on the property. My 30+ years of evaluating thousands of properties and using Zillow as one of my sources in legal proceedings reveals in my opinion that the evaluation model employed is rarely accurate to a statistical certainty and in most cases a more detailed analysis reveals that it overstates value. A court of law, mainly bankruptcy, in my experience will not accept such evaluation models as valid for purposes of lien stripping in Chapter 13 cases. Zillow is an excellent service that does a great job of providing a good starting point for value however, stating that less homeowners are underwater may be a stretch. Surely do not want to discourage Zillow from doing what they do… I just have trouble accepting the conclusion as a fact at this juncture and that it is an interesting statistic based on the analytics that Zillow employs.
Hi Kelli,
Katie from Zillow here. Just wanted to take a moment and explain a bit about the methodology behind our negative equity numbers.
Although we use the median value of all homes (not price of only those that have sold, but value of all) in our Zillow Home Value Index, that is not how we calculate negative equity. To calculate negative equity, we look at the amount of loan on an individual home and compare that to the current value of the home (we do this for single-family homes with mortgages).
Your point on using median sale price is well-taken. Our Chief Economist Stan Humphries did some research on that, and explained why we use the median value of all homes, rather than just of those that have sold recently: http://www.zillow.com/wikipages/Reasons-Why-Median-Sale-Price-is-Flawed/.
To answer the question as to why negative equity fell nationally, we’ve determined that, in most areas, it’s likely this is due to foreclosures. When a home is foreclosed upon and the ownership goes, in most cases, to the lender, it’s no longer in negative equity. Of course, in some areas of the country (especially in California), home values have been rising for the past year, so fewer people there are in negative equity because the value of their home has risen.
I’m always happy to answer any questions you might have about our data or methodologies. You can find our contact info here: http://zillow.mediaroom.com/