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Demystifying the Zestimate®
Knowing the value of your home is helpful in many ways. It can help determine one’s net worth, help decide if a home sale or purchase is a financially feasible move, determine the ability to get a loan – and it’s just nice to know where your largest investment stands. Consumers have the option to access websites such as Zillow® to search the Zestimate® or other Automated Valuation Model (AVM) on their property.
A Zestimate is an AVM. The product of an automated valuation technology comes from analysis of public record data and computer decision logic combined to provide a calculated estimate of a probable selling price of a residential property. An AVM generally uses a combination of two types of evaluation, a hedonic model and a repeat sales index. The results of each are weighted, analyzed and then reported as a final estimate of value based on a requested date.
Often times when we talk with potential sellers, their Zestimate (or other AVMs) come up in the overall conversation, which is understandable. This information is relatively easy to access and gives the seller a starting point on the value of their home. Where an AVM can become dangerous is when a consumer thinks it’s accurate. Even worse, when a consumer makes a major financial decision solely based on this information. According to Zillow, less than half of all Zestimates in the Seattle metro area are even within 5.4% of the actual value, and they only give themselves a 2-star (fair) rating on their accuracy. In fact, they publish an accuracy report that you can view here.
In August, the average home price in the Seattle Metro area was $824,000. With less than half of all Zestimates within 5% of the actual value, that is a beginning margin of error of $41,200! Further, they claim that 72.3% of their Zestimates are within 10% of the actual value, which is a marked difference – up to $82,400. Where AVMs are incomplete is that the basis of their formula is tax records, which in our experience are often inaccurate. Also, and most importantly, an AVM does not take into consideration the condition of the home, the neighborhood and other environmental impacts such as school district, road noise and unsightly neighboring homes, to name a few.
At the end of the day, to give an accurate accounting of the value of a home in today’s market requires actually physically touring the home and the surrounding homes that compare. As well as considering current market conditions such as supply and demand and seasonality. An algorithm cannot accomplish this, but a real estate broker can.
So why does the Zestimate exist? Zillow is a publicly traded company (ZG) and their website is their vehicle to create profit. The Zestimate drives consumers to the website who are often dipping their toe in the pool to see what their home might be worth, or searching available homes for sale. When a consumer is searching on the website they are surrounded by real estate broker and mortgage broker ads on every page. These real estate brokers and mortgage brokers are paying for that advertising space, which is how Zillow makes its money and why there is a Zestimate. The Zestimate is not a public service, it is a widget to bring eyes to their advertising space which in turn, sells more ads.
Another important item to note is that Zillow does NOT have all available inventory in the Greater Seattle area on their website. In May, they cut off access to manually input listings, leaving some real estate firms unable to get their listings on the site any longer. Some firms just plainly chose not to syndicate to them. It is estimated that Zillow has between 70%-80% of the total available inventory on their site. In an inventory-tight market like the one we are in now, it is important for consumers to understand that if Zillow is the only source they are searching with, they may be missing out. Brokerage firm websites such as ours have a direct IDX feed from the Northwest Multiple Listing Service which refreshes every 15 minutes, insuring the accuracy and completeness of all listing data.
The moral of the story is this: use Zillow as one of the many tools in your real estate evaluation and search toolbox. Zillow provides a great starting point and contains a ton of information to whet your palate when embarking on a real estate endeavor. However, we live in a time of information overload and we are overstimulated at best. Nothing beats the evaluation and discernment of a knowledgeable and experienced real estate broker to help you determine accuracy, which will lead to the empowerment of clarity.
If you are curious about the value of your home in today’s market, please contact us. Any one of our experienced agents can provide an annual real estate review of all of your real estate holdings, or even dive deep into a complete comparative market analysis if you would find that helpful. It is our goal to help keep our clients informed and empower strong decisions.
Zillow® and Zestimate® are trademarks of Zillow, Inc.
Many Factors to Consider When Choosing to Rent vs. Own
*The amount of time you need to own your home in order for owning to be a superior financial decision.
There has been a lot of talk lately about the cost of living in the Greater Seattle area. Whether it has to do with home prices or rental rates the story is the same: it is becoming more and more expensive by the month. With rising rental rates, historically low interest rates, and home prices on the rise, the advantage of buying vs. renting has become clear for folks that have a down payment saved, good debt to income ratios and strong credit. In fact, Seattle is now the 10th most expensive city to rent in the country according to a new study from Zumper.com. The average monthly rental price for a one-bedroom apartment in the city of Seattle is $1,740! Snohomish County has seen an increase in apartment growth and rising rental rates as well. Currently, the breakeven horizon in the Greater Seattle area (the amount of time you need to own your home in order for owning to be a superior financial decision versus renting) is 1.6 years according to Zillow research.
There are several factors to consider that will lead you to make the best decision for your lifestyle and your financial bottom line. One of the biggest factors is interest rates! Currently, the rate for a 30-year fixed, conventional, conforming loan is hovering around 3.5%. That is amazingly and historically low, making the advantage of securing a mortgage huge. What is nice about having a mortgage is that the payment stays the same over the term of the loan. With renting, rates can be increased at any time, and you are paying down someone else's asset, not your own. Owning gives the homeowner control over their overhead while getting to make their house their home. What is also so great about owning is that once you have hit the breakeven horizon, every month that ticks away thereafter is building your nest egg in value. Did you know that American homeowners’ net worth is 36 times the amount of renters? The long term benefits of owning are abundant. These are important factors to consider for everyone, but especially the younger folks that are enjoying the benefits of Seattle’s attractive job market and competitive wages.
Where folks are having to compromise most due to affordability is commute times and settling in less urban neighborhoods. Some people, mainly millennials, have not been willing to give up living in the more core urban neighborhoods that have high walk scores and shorter commute times. That should be apt to change as rents are rising fastest in those areas. The advantages of moving out a little further and securing a home will start people on the track of building long term wealth. If you or anyone you know is currently renting and is considering a change, please let us know, as we would be happy to get your questions answered to help you make an informed decision.
Looking Towards the 2016 Real Estate Market
As we round out a very strong 2015 in the real estate market, it is time to look towards 2016 and what it may bring. After two straight years of inventory challenges, multiple offer madness and steep price appreciation, will things start to temper? Below is a list of my predictions for what 2016 might hold for the real estate market. These are fun, educated guesses based on studying the market and paying attention to important indicators. I hope you enjoy and I welcome your questions or discussions.
1. Interest Rates: They have been saying for a few years now that interest rates are going to go up, and they really haven't. Since 2012 they have ebbed as low as 3.375% and as high as 4.25%, and are currently leveled out at 4% on a 30-year fixed conventional loan. By the end of 2016, I predict that they will be just under 5%. As the economy continues to improve and consumer confidence grows, an increase in rates will be important for the health of our overall economy and the public should be able to handle this rise. Plus, we must not lose sight that the average interest rate over the last 30 years has been 6.959% and we are still WAY below that.
2. Listing Inventory: Inventory has been the biggest challenge this year, with King County hovering between one and two months of inventory and Snohomish Country hovering between two and three months of inventory in 2015. That is LOW!! There are two reasons it has been that way; we have had 21% less homes come to market in King County year-over-year, and 15% less in Snohomish County. There have also been more buyers in the market, causing demand to heavily outweigh supply. In 2016 I think we will see more homes come to market, due to the fact that as prices have appreciated, homeowners have gained much more favorable equity positions, giving them options to make the moves they've been dreaming of and waiting for. Folks are ready to upgrade their lifestyle, whether that means buying a bigger home or transitioning to a "right" size home due to retirement. Pent up seller demand due to these equity and lifestyle factors will lead to an increase in homes coming to market.
3. Buyer Demand: Buyer demand will remain strong! This is largely related to our booming job market and the expanding tech sector. Our unemployment rate is 4%, meaning jobs are more abundant than they have been in years, and wages are growing in every county. Couple this with low interest rates, and it equals a more-than-plentiful pool of buyers. One factor to look out for as we head into 2016, is if the strong buyer demand we have will quickly absorb any increase in inventory, keeping months of inventory basically the same as 2015. This will be a fun one to watch.
4. Prices: We will indeed continue to see price appreciation due to the factors above. Year-to-date, median price appreciation in King County is up 8% complete year-over-year and up 9% in Snohomish County. A year from now I anticipate price appreciation to slow to 6% in King and 5% in Snohomish, due to a bit more inventory, and meet peak levels. This is still higher than the normal 3-4% year-over-year appreciation, but it is below the double-digit appreciation we saw in 2013 and 2014, thank goodness! As we have dug out of the Great Recession's hole and regained equity levels after the fall of the sub-prime mortgage fiasco it is important to retreat back to more sustainable appreciation levels.
5. First-Time Home Buyers: The big talk of 2015 was the Millennial generation, and when they would jump into the housing market. They have started to make their play as they are getting some of those great tech sector jobs, but many are limited in purchasing due to high student loan debt. We are starting to see FICO scores loosen up a bit for this reason. Interestingly enough, the average FICO score for a denied borrower for a conventional loan was 700, and 754 for an approved borrower. Average FICO score for a FHA borrower who was denied was 635, and 687 for an approved borrower. These are important factors to pay attention to along with debt-to-income ratios. Also important to note is that rents are extremely high in the Greater Seattle area, so the cost of owning over the long term is more favorable. Once the Millennials decide that they are ready to settle down, what they are willing to have their commute look like and pay down some of that debt they will be ready to start building household wealth by buying vs. renting.
If you or anyone you know has any questions about real estate, please don't hesitate to contact any one of our agents. We are here to help!
