From the Cromford Report’s Michael Orr

May 16, 2014 by · Leave a Comment 

Unfortunately Zillow® has decided to provide 12-month forecasts for home values. Since the figure given is a forecast for the Zestimate® value, it does not necessarily have any relationship to real market value. On the other hand, this means it can never really be challenged because the Zestimate is created by Zillow in the first place. In the past Zillow Zestimate’s have often been greatly divergent from real market values. In the cases I have watched they have often been extremely volatile for no apparent reason, sometimes rising or falling by 10% or more in just a few weeks. I have also seen Zestimates that were 80% below or 200% above true market value, though this sort of aberration seems to be getting rarer.

In the past Zillow forecasts for the wider market have not proven to be at all accurate, so I despair at the thought that ordinary members of the public will take them seriously for individual homes. Giving a percentage change to one decimal place gives a false impression of precision for a number that is more likely to be wildly wrong than close to accurate.

In the case of my own home, Zillow is forecasting a loss in Zestimate of 1.3% over the next 12 months. That doesn’t seem too unlikely, quite frankly, but their Zestimate for my home has dropped 2.9% in just the last month and 8.2% in the last 6 months. In fact 6 months ago their Zestimate for my home was ludicrously high – some 20% higher than any other automated valuation I could find. Meanwhile Trulia’s estimated value for the same home has rocketed upward in the opposite direction during the same 6 months and they are now higher than Zillow. Home owners tend to believe the highest number they can find. The variation between these automated valuation tools is enormous and there is no evidence that Zillow’s is better (or indeed any worse) than the 25 or so other tools I have seen.

The fact is that a real appraisal or professional CMA are the only sensible ways to estimate a home value. Even these can vary a lot depending on who conducted them, and Zillow’s Zestimate numbers really should be used for entertainment purposes only. As long as they are used purely for entertainment value they not a problem. Unfortunately ordinary members of the public tend to think there is some real world basis for them, which provides nothing but problems for real estate professions who actually know what they are talking about.

For those interested in how accurate Zillow’s forecasts have been in the past, take a look here:

http://www.zillow.com/research/home-value-declines-pick-up-in-fourth-quarter-but-zillow-forecasts-smaller-declines-in-2012-2282/

In February 2012 Zillow predicted that Phoenix metro home values would increase by 0.6% between December 31, 2011 and December 31, 2012.

The actual change in average $/SF was 29.5%, so Zillow was only wrong by 28.9 percentage points.

For the country as a whole, Stan predicted a 3.7% decline in values during 2012 and no housing bottom before 2013. Funny how they never mention that any more.

The Zillow prediction for 2013 was for national home values to rise by 3.3%. Phoenix area values were predicted to rise by 8.5%. Phoenix actually rose by 16.7% in 2013 and the national increase was about 13%. Again there is almost no correlation between Zillow’s forecast and what actually happens. However I must admit that the 2013 forecast was a big improvement over the 2012 one.

In case you think I am picking on Zillow, I am not. Their forecast was actually better than many. We quote Jed Kelko, Chief Economist at Trulia: “Arizona’s home prices are going to fall by 7.2% between Q3 2011 and Q3 2012”. That was possibly the worst forecast in recent history, as average $/SF rose by 26.5% instead. Trulia’s error was 33.7 percentage points. Even this was not quite as bad as several forecasts produced between 2006 and 2012 by S&P / Case-Shiller / Moody’s Analytics many of which have been proven dramatically wrong during that 7 year period.

Remember the wise words: Prediction Is Very Difficult, Especially About the Future – Niels Bohr (1885-1962)

 

Better Late than Never

Better Late than Never

May 2, 2014 by · Leave a Comment 

2014 began with a whimper as demand from Buyers waned to historically low levels.  Sellers, who seemed to be missing in 2013, showed up but buyers seemed to be unaffected by the increased selection of homes.  Market watchers kept looking for signs of the buyer drought ending to no avail – until now.  Finally buyers have begun buying again.  Whew, let’s all take a breath.

“Buyers” as a category form two sub-categories – investors and owner occupants.  In previous articles we mentioned that the Hedge firms who had been buying for a few years here have largely ended their buying.  But investors also include the “fix and flip” groups as well as individuals buying a home or two for their personal investments.  We see that investors are buying at the lowest levels in years – a good sign in our opinion.  To quote the one and only Michael Orr of the Cromford Report:

“Except for those unusual periods, which were dramatically affected by government intervention, the last time we saw investor buying activity lower than 16.2% (the current level) was December 2008.”

This tells us that the category of buyers currently in recovery is the owner occupant buyer.  This is a positive sign.  Although the change is only newly in place, if it continues for the next few months it likely will keep our market from swinging to a strong buyer market and prevent pricing erosion.

Interestingly, buyer demand has varied dramatically according to price range.  Predictably, in the 200K and under price range both supply and demand are down.  Supply is down due to the distress product evaporating and the resulting price rises that accompany diminished distressed sales.  The dropped demand at that price come from investors leaving (as this was their preferred price point) as well as first-time buyers opting to rent rather than purchase (either by choice or necessity).

Comparing the low end housing to the high-end and you find a dramatically different story.  As Michael Orr comments:

“For Greater Phoenix in March we had 109 sales of homes priced over $1,000,000. This is the highest March number for million dollar homes since 2008. For homes priced at or below $1,000,000 we had 6,503 sales which is the lowest March number since 2008. This divergence between luxury home sales and the rest of the market is quite striking. However there are still plenty of homes over $1,000,000 for sale so supply is not an issue. It must also be remembered that a home priced at $1,025,000 this year may have been $975,000 last year.”

Needless to say, demand will be the most critical area to watch this year.  Demand will determine which direction our currently flat pricing will take.  A word of caution, don’t be mislead by potential news reports that state our “median” price is rising.  Due to the increase in high end sales and the sharp decrease in low end sales – rising median pricing could be falsely interpreted as “the market price” is rising.  At this time, pricing is flat.

When demand is weak in housing for an extended period, the population must go somewhere – and in this case it means rentals.  Demand for single family rental housing has seen a sharp increase.  Eventually this will be good news for the housing market as first time home buyers leave rentals when owning is cheaper than renting.  We are not there yet, but the signs are pointing to that as a future possibility.  Here is what the Cromford Report says:

The scarcity of single family homes available to rent is getting extreme. Other types of rentals are not so hard to find for rent, but single family homes have dried up, probably because so few new rentals are being created compared with 2010 through 2013.

On January 1 we had 4,377 active single family rental listings. Today we have 2,391. That is a 45% drop in less than 3 months. On March 1 we had 2,806 so they have dropped 15% just in the last 30 days…. if inventory remains as tight as this it is likely that landlords will take the opportunity to push single family rental rates upwards.

So the watchword for now is “demand”.  It is a situation we will continue to closely monitor and so keep our wonderful past, present and future clients fully informed.


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