Economist's Commentary: August 6, 2008
Are Homeowners in Denial?
By Lawrence Yun, Chief Economist
Home values have not fallen, say homeowners in a recent survey, despite the large outcry from the media proclaiming the worst housing crisis since the Great Depression. The Case-Shiller home price index showed a price decline of 17 percent from peak to current with all markets showing lower prices now than one year ago. What the heck is going on? Here are my thoughts on what may be happening.
First: the survey by Zillow/Harris Interactive says that only 38 percent of homeowners indicating a fallen home value. Slightly more, at 40 percent, indicated a higher home value, while 22 percent said no change.
Second: the widely quoted Case-Shiller price index has several flaws, including very limited geographic coverage and an over-dominant reliance on subprime-related distressed property sales, according to the Washington Post. Wider geographic coverage including many mid-American cities and rural areas would show no price declines in the data. Furthermore, Zillow's 'zestimate' is well known for their wildly off the market valuation, so one cannot presume that Zillow is correct and homeowners are wrong.
Third: most homeowners are not in the market. Less than 10 percent of homeowners in a given year move. Therefore, most are not in a position to truly know what their home will fetch on the market. Many are no doubt eagerly surfing the 'net to satisfy their curiosity about what their neighbor's home sold for, but because each home is different (I have granite counters and you don't - for example), even a simple comparison cannot precisely determine what the home will sell for on the market. The only way to truly know is to actually put the home on the market. However, as I mentioned, more than 90 percent of homeowners are not in the market.
Fourth: the intrinsic value of a home is differently assessed by each owner. It is very hard for a homeowner who has put weeks of sweat equity into home improvement to admit that all that work resulted in the loss of home value. The market dictates the conditions - and not home improvement projects - but the feeling will be such that the lowering value of the home means a lowering of value of the homeowner and all of his or her efforts. Therefore, if the market can only clear at a lower price, the homeowner says the home is worth more than that and prefers not to sell.
Fifth: the current housing cycle is very unique because of the problems caused by subprime loans and the resulting foreclosures. Neighborhoods with very large exposures to subprime loans have seen home values plummet to the tune of 20 to 30 percent or even more. Meanwhile, neighborhoods with very little subprime loans have seen very little or no declines in home prices. Given that only 9 percent of homeowners have subprime loans, then the overwhelming 91 percent of homeowners are living in areas with very little subprime loans. So it is very reasonable that the majority of homeowners, as stated in the survey, have not witnessed a decline in their home value.
Sixth: most homeowners cannot pinpoint the exact values of their homes as of June 2007 and June 2008. Homeowners are so busy with everyday activities that they view homes in a broader, longer-term perspective. Many simply sense that their home values are doing fine and that matches the data, which shows generally that the higher the home value, the longer the time horizon for comparison. Even in those wild markets that underwent a boom and bust, homeowners saw a giant leap in home prices during the boom. Now prices have given way, yet they are still ahead.
The bottom line seems to always be that consumers are smart and they know what they are talking about. Their perception indeed matches up with what may genuinely be happening in reality.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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