Summary of Zillow Talk: The New Rules of Real Estate
All content credited to the authors, Spencer Roscoff and Stan Humphries, and to Grand Central Publishing.
My financial planner recommended this book when I mentioned we'd start looking to buy a home some time in the next few years. It's a great read, and full of interesting anecdotes. Sometimes I found myself mentally summarizing the chapters, which are written like short blog posts. By the time I'd finished the book, I decided to write down my notes and put them here in case someone finds them useful.
1. Warren Buffet Is (Always) Right
Why Buying a Home is Still a Really Smart Investment
Buying a home is a good investment, for three reasons. First, taking into account "stock dividends, rental income, tax advantages" and other factors, the authors conclude that for the period 1975--2014, the S&P 500 returned 10.4 and real estate returned 11.6 percent. Second, real estate is less volatile than stocks. Third, with \$100,000, you can take ownership of a \$500,000 home, but only take ownership of \$100,000 worth of stocks.
2. Stats and the City
Timing is Everything When Deciding to Buy or Rent
When deciding between buying and renting, how long you plan to stay in your home determines which one is a better financial decision. If you plan to stay for only a short time, you should rent. If you plan to stay for 20 years, you should buy. There's a breakeven duration, after which the financial decision flips from renting to buying. The breakeven horizon varies by market, from a low of 0.9 years in Riverside, California, to 4.2 years in Washington, D.C.
3. 2-4-6-8 Neighborhoods That Will Appreciate
Predicting the Next Hot Spot
Homes farthest from the city center appreciate more quickly than homes in the city center. Hip, cool, expensive neighborhoods have a halo effect--after a few years they will pull up the values of homes in surrounding neighborhoods. The strongest predictor of a neighborhood's gentrification is average age of its housing stock: "The older the average is, the more likely a given neighborhood will see strong appreciation." The final predictor of a neighborhood about to appreciate is low home ownership.
4. The Starbucks Effect
How Lattes Perk Up Home Prices
The authors compare Starbucks locations with Zillow home prices. They find that Starbucks causes home prices to appreciate. Dunkin' Donuts doesn't cause the same effect.
5. It's the Worst House for a Reason
Why You Shouldn't Buy the Worst House in the Best Neighborhood
The authors began with the bottom 10% of homes in each zipcode, and looked at their appreciation versus the other 90%. On average, they found that the bottom 10% homes do neither better nor worse. However, the more affluent the neighborhood, the worse the bottom 10% performs, because high-end buyers in affluent neighborhoods aren't interested in low-end houses. Instead, buy a home in any neighborhood where you can afford a home that's not in the bottom 10%.
6. Do Your Homework
Finding a Great School District In Your Price Range
Usually home prices in a great school district are higher than home prices in a lousy school district. Furthermore, to move from an average school district to a good school district might cost 20% more in home prices, but a move from a good school district to a great school district could cost 40% or more in additional home cost. However, some states are more egalitarian (NY, NM, SC, VA, MN), meaning the schools in the low-price neighborhoods are just as good as the schools in the high-price neighborhoods. The authors recommend using Zillow and their GreatSchool rankings to locate affordable housing near excellent public schools.
7. ARMs and Legs
Fixed-Rate Mortgages Aren't for Everyone
30-year fixed rate mortgages (FRMs) are a very strong convention in America. FRMs only exist because Fannie Mae and Freddie Mac provide banks with enough incentive to grant a long-term loan with an interest rate that can never go up (but which can go down when the customer refinances). With an Adjustable Rate Mortgage (ARM), the rate is fixed for 1--7 years, and then the interest rate fluctuates with the market. If you plan to stay in your house for less than 5 years, an ARM may be a better choice. Ultimately it's a matter of luck whether the interest rate after 1--7 years will make the ARM cheaper or more expensive than a FRM.
8. Apples and Oranges
How to Determine Whether Buying a Foreclosure Is a Good Deal
Foreclosures are usually smaller, cheaper homes than non-foreclosures. Zillow authors calculate that the "foreclosure discount" in September 2012 was 7.7%, not the 25% frequently cited. The foreclosure discount is less in markets with high demand. Furthermore, the practice of buying foreclosures has become common, additionally reducing the foreclosure discount by washing away the stigma associated with foreclosures. Foreclosures are cheaper because banks want to sell them quickly, because they're probably in bad shape (someone in financial distress probably will defer maintainance in favor of groceries and other bills), because they're risky due to having no inspections, and often selling sight-unseen, and because there's a stigma attached to foreclosures.
9. What to Expect When You're Inspecting
How to Pick The Right Home Inspector
When picking a home inspector, ask how long they've been in business, whether they're licenced/bonded/insured. Ask for testimonials. Use Angie's List. Ask for sample reports for good houses and bad houses, and make sure they're detailed and that they explain next course of action. Make sure he has a good website, dresses well, and generally presents himself professionally. Always be present for the home inspection itself, and follower the inspector everywhere possible (attic, crawl space).
10. America's Next Top Remodel
Not All Home-Improvement Projects Are Created Equal
When selling a home, some will invest in home-improvements to boost the selling price. Some of these projects have negative ROI, and some have positive ROI. Diminishing returns means that a mid-grade renovation to a bathroom or windows (say, \$3,000 or so) might return \$1.87 for every dollar invested, but a high-end renovation (\$12,000 or more) might return only \$1.00 or even less than a dollar. Kitchen renovations have the lowest ROI. Adding a story is probably break-even, and renovating a basement is about the worst ROI you can do (50%). You'll lose about \$2,600 of potential higher resale value each year after a remodel (spending \$5,000 in 2012 may yield \$5,000 greater resale value in 2012, but only \$2,400 in 2013), so it's best to do the remodel immediately before putting your house on the market.
11. Magic Words and Dangerous Descriptors
How to Write an Effective Listing
Calling a home "unique" is a signal to buyers that there's something wrong with it, which is reflected in sale prices 30--50% less than expected. Most age-related words ("modern", "classic", "contemporary") mean the house is old. Even "state-of-the-art" probably means it was built in the 1980s. "Cute", "charming", or "cozy" mean it's a very small home. If the listing includes the words "potential" or "investment", it's in bad shape and needs work--those homes see final sale prices 7% below asking. "It's important to remember that...what's driving the increase in sale price isn't necessarily the adjective itself, but an underlying truth about the home." If your home has a nice feature, it pays to mention it in the listing. "The lesson for sellers here is clear: If you've got it, flaunt it" (by including it in the listing). Longer listings, up to about 250 words, sell for more.
12. March Madness
When to List Your Home
Listing your home at the end of March will make it sell faster and for more money. "Put your home on the market after you fill out your NCAA March Madness bracket, but before someone slips on an ivy-green jacket at the Masters golf tournament in Augusta, SC."
13. (There is no chapter 13)
14. Real Est8 4 Sale
Use Superstitions to Your Advantage####
In Chinese, 8 is lucky and 4 is unlucky. "Areas with high Chinese populations have far fewer list prices that end in "4"s than the national average." But does having these numbers affect the final sale price? Yes, in areas with >=10% Chinese population, homes with prices ending in 8 sell for 1.5 percent more, and homes with prices ending in 4 sell for 1 percent less.
15. The Price Is Right
How to Determine Your Asking Price
About half of homes cut their prices before selling, usually by about 6.9 percent. The more a home is overpriced, the more it will sell for under its true market value. A house overpriced by 10% will on average sell for 2 percent under market value. It also costs in time, as homes will linger on the market. Sellers don't like homes which have been on the market for too long. Correctly priced homes spend 107 days on the market. "Listings needing a 10% price cut spend an average of 220 days on the market."
16. Nine Is the Magic Number
How to Sell for More by Asking for Less
On average, a home will sell faster and for more money if its original price ends in a nine instead of a zero (e.g. \$149,000 or \$149,900). The effect is less noticeable for higher-cost homes.
17. Appraising Real Estate Agents
Review Correlate with Performance
Unlike travel agents, real estate agents aren't going anywhere, because home purchases are infrequent, emotional, and expensive (so transaction costs are relatively low and worthwhile). Sellers agents, aka listing agents, are spread out like income inequality in the US: The top few percent sell most of the homes. Top sellers do 22 homes per year, great ones (top 10%) do seven, and everyone else does about 2. Experience usually correlates to homes sold per year. But data shows that experienced agents won't sell a given house for more money than a rookie agent. Female agents sell for higher prices and faster. The difference is minuscule though. Agents with good reviews are statistically better than agents without.
18. The Gayborhood Phenomenon
Property Values as a Bellweather of Social Change
"Home prices in historically gay neighborhoods have steadily outperformed average prices for the metros in which they're located."
19. What's in a Street Name?
What Street Names Tell Us about Property Values
Names are better than numbers. A home on 10th street is probably worth less than a home on a Elm street. Main Street is worth about 4% less on average. Less common names like Lake and Sunset are worth more, but probably because they describe something about the neighborhood or the view. Houses on "Ocean Ave" in Miami or Boston are worth more, but "Ocean "Ave" in Detroit is worth just average, because there's no ocean view to back it up in Detroit. As for suffixes, the most common (street, road) tend to be the least valuable compared to less common suffixes (way, place, court).
20. Empire Real Estate of Mind
Analyzing the Oddities of New York City
NYC is expensive, dense, and has low home ownership. Prices are linked to the performance of Wall Street. Buildings are tall.
21. The Wild, Wild West
America's Most Volatile Housing Market
Phoenix, Riverside and Las Vegas are three of the largest and most volatile real estate markets. Home prices there swing by 2--4% each quarter, with histocal min/max of -10/+15% per quarter. Whether a house in these markets will lose value over five years is about 50/50 odds. Volatility leads to greater volatility--underwater buyers can't sell, drying up the supply of homes, spiking prices. Why are these markets volatile? High employment flexibiltiy--jobs are there when times are good, and those jobs leave when times get bad. They're also markets for snowbirds, who buy second homes in warm climates when times are good, and sell them when times are bad. These markets also attract a lot of foreign buyers, who bring more volatility for the same good times/bad times reason.
22. Statistics Are People, Too
Looking at the Housing Bust in More than Just Dollars and Cents
There's "a strong relationship between the perforamnce of the housing market and Gallup's measure of Americans' level of optimism about the economy", but the authors don't know which one causes the other. The same goes for cholesterol, blood pressure, cigarette smoking, surveys about smiling, and other factors of general well-being. Homeowners are more conservative, more religious, and have sex less frequently than renters.
23. What's Walkability Worth?
How Walkable Neighborhoods Affect Property Values
People like walkable neighborhoods, which can be quantified with the Walk Score, which Zillow now incorporates. The authors make two points in this chapter:
- "Home prices in more walkable areas offer higher returns and recover faster from market downturns."
- "What walkability is worth really depends on you."
24. Owning Isn't for Everyone
The Case for Decoupling Homeownership and American Dream
The authors begin with examples of Americans' reverence for homeownership.
"Based on our analysis of home values during the past two decades, one thing is crystal clear: Subsidies for low-income families to buy homes in low-income neighborhoods ultimately hurt the very people they purport to help." Why?
- Buying a home is a gamble that you'll stay there for a long time. People who live paycheck-to-paycheck can't afford that gamble.
- If a home loses value, that negative equity hurts a low-income family more than it hurts a higher-income family
- Housing returns in low-income areas are lower and more volatile than in high-income areas, so the homes themselves can be bad investments. Encouraging people to invest in these low-income communities hurts those people.
"Equating homeownership with the American Dream is simply, and indisputably, a policy nightmare." Inequality hurts everyone, so we should tackle it, but not by encouraging homeownership.
25. The Third Rail of Real Estate
Is the Mortgage Interest Deduction Really the Best Use of $100 Billion?
The authors start with a history of the Mortgage Interest Deduction (MID), from the first 1913 income tax year. "Many argue that the MID encourages home ownership and builds strong communities", but it's easy to find places with home ownership and strong communities but no MID. Enter Canada, which has the same rate of home ownership as the US.
Economists think home values would be slightly decreased if we ended the MID, and most pronounced in high-end homes. Only about half of Americans pay income tax, and only about a third of those actually itemize deductions, and about a fifth of those rent rather than own. So only about 13% of Americans take the mortgage interest deduction each year.
Suppose we capped the MID at \$25,000. Of the top 100 zip codes likely to be hardest hit, the mean home value is \$865 thousand. So today, the MID is helping those who are already the most well off. Instead, we should have a first-time home buyer tax credit or even a cash grant.
26. Down by the Seaside
How Waterfront Property Plays by Its Own Rules
"Why do people keep building homes and lives in places that are so prone to becoming [flood or hurricane] zones? And why does the government keep backstopping waterfront real estate?"
People want to live by the water, even though climate change is causing more and worse storms. There's a huge price premium as a home gets closer to the coast, and it doesn't dip even after devastating storms. Why is this market so distorted? It's because of the U.S. goverment's policy to build and rebuild homes destroyed by storms (via various gov't agencies).
It's too expensive to buy flood insurance near the coast, so we have the National Flood Insurance Program (NFIP). But not enough people buy into it, so the premiums are subsidized. Some consider the NFIP a reason to continue building homes in flood disaster areas, creating "severe repetitive loss properties".