A couple of days ago, this question came in from the Ask the Broker page:
Question: I love my home .. bought in 2000 for 289,000 re-fi in 2006 at 376000.00 todays worth 305,000 according to zillow. I’m torn, should I short sell and cut my losses or should I keep fast and steady. I’m trying to figure out my home appreciation in 10 years. I reside in peoria zip 85383
What we have here is basically an unanswerable question. Please allow me to explain why”¦.
I look at this as a two-parter ”“ 1) “should I short sell and cut my losses or should I keep fast and steady”; and 2) I’m trying to figure out my home appreciation in 10 years.
Should I short sell and cut my losses or should I keep fast and steady?
First, you really should not use Zillow.com as a basis for your home’s value. Zillow (among others) uses an algorithm to calculate your home value. Basically it pulls public records for information on your home and others around it that have sold recently. Ostensibly using such “comparables” is correct ”“ it’s what appraisers and real estate professionals use to estimate the market value of your home. The problem with any AVM (Automated Valuation Method) is that a computer can determine who your home really stacks up to said comparables. A computer can’t see your home, or the others around it.
By their own admission, Zillow’s “Zestimate” (their estimate of a homes value) has a median error of 12.7% in Maricopa county. They also state that 65% of the real estate transactions in Maricopa county had a Zestimate within 20% of the actual sales price. Simple math tells us that 35% of Zestimates in the Phoenix area are off by more than 20%.
In other words, the $305K valuation you are seeing in Zillow may not be accurate.
How do you get a better idea of the market value of your home? You can either pay for an appraisal, or have a real estate agent prepare a CMA (Comparative Market Analysis) for you. And of course, not all appraisals or CMAs are created equally either”¦
All that being said, refinancing in Maricopa county in 2006 means it’s probable you are indeed underwater ”“ you owe more on your home than you could sell it for in today’s market. How much you are actually underwater is another question. It may not be as bad as Zillow indicates (to be fair to Zillow, that Zestimate could be spot on. Or you may be deeper underwater than indicated”¦).
So”¦ do you short sell and cut your losses or keep fast and steady?
I can’t answer that question.
Short selling may not even be an option. Unless you can prove a hardship to your lender ”“ prove that you can not continue to make the payments ”“ it is unlikely they will approve a short sale. LOTS of people are underwater. I’ve yet to meet anyone that likes making payments on an home that isn’t worth now what it was then. But your not liking to make the payments means nothing to the lender. To be honest, they could care less whether you like it or not”¦ So if you still have the financial means to make your mortgage payments, short selling is probably not even an option.
If that’s the case, keeping fast and steady, getting a loan modification (good luck with that), “walking away”, or renting the home may be your only viable options. Yes, this stinks to high heaven, but that’s reality.
(Someone is likely to chime in and say, “But some lenders are approving short sales without proving a hardship”. That may, or may not, be true. I’ve personally not experienced such an approval. Heck, in a majority of cases lenders won’t approve a short sale even if you can prove a hardship”¦)
This brings us to the second part of the question,
I’m trying to figure out my home appreciation in 10 years
I wish I could predict home appreciation 10 years out. But there are way too many factors to comprehend, many of which are impossible to predict, for anyone to be able to accurately state future home appreciation rates. A historical analysis of appreciation rates is about the best we can do.
Here’s a chart showing average annual appreciation for Peoria since February 2001 (click image for larger view):
As you can see, it’s been a wild ride. Annual appreciation peaked at about 52% in August 2005, and bottomed out at ”“35% in March 2009. The good news is we appear to be back to zeroish. What happens next is really anyone’s guess. If you want my guess, I’ll say that appreciation rates will bounce along at 2 ”“ 3% for the next several years, possibly returning to long term historical appreciation of 4 ”“ 5% after that (along the lines of the first third of the chart above).
And I reserve the right to be completely wrong.
What is going to drive future appreciation? The economy, the credit market, and the composition of the housing inventory. I wouldn’t even hazard a guess as to the future of the economy. I don’t think the credit market will ever return to where it was in 2004 ”“ 2006 ”“ where all that was required to get a mortgage was a pulse. In fact, I hope the credit market never returns to that state. I’m of the opinion that the ridiculous run up (and subsequent destruction) in appreciation rates was due in large part to lax lending standards.
As for the housing inventory, there is still a dearth of “distressed properties” (foreclosures and short sales ”“ aka pre-foreclosures) for sale throughout the Phoenix metro area, including Peoria, as evidenced by this chart:
58% of the current listings in zip code 85383 are distressed properties. Until this inventory bleeds off, which could take years, the market can’t do a whole lot with respect to home appreciation.
The Bottom Line
The “What should I do?” questions are exceedingly difficult to answer. Especially if one isn’t privy to the questioners financial situation. “Strategic Default” (basically walking away from your home/mortgage) is a very personal decision ”“ one that I could never answer for someone other than myself. A decision to short sell, if that is a viable option, is also a very personal decision. All I can do is arm someone with information (limited as it may be) and leave it to them to decide for themselves what is best given their personal decision.
Charts from CromfordReport.com using data from public records and data licensed from the Arizona Multiple Listing Service (ARMLS). Cromford Associates LLC, ARMLS and yours truly, Jay Thompson, expressly disclaim and make no representations or warranties of any kind ”“ express, implied or statutory ”“ as to the accuracy of the data, nor its merchantability or fitness for any particular purpose.
In other less legal-like words, if you use this data to make personal, business or investment decisions and something blows up, it’s not our fault and you can’t sue us.