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Beware of inflated home value reports

Zillow • Sep 3, 2013 at 4:07 PM

By S.E. Slack

Year-over-year home values continue to drop or barely inch forward from the River City to the tree-lined streets of Ohio. Yet some recent reports claim that home prices are continuing to rise at an eye-popping 12 percent or more.

Why the discrepancy? An inflated sense of national home value appreciation because of inherent biases in reporting processes, according to real estate firm Zillow.

Many cite the S&P/Case-Shiller Home Price Indices, which are the leading measures for the U.S. residential housing market, when reporting the value of residential real estate. However, Case-Shiller’s tracking primarily involves large, coastal metro areas that are currently seeing enormous home value gains. Plus, it includes foreclosure resales. Because of those inclusions, that index is currently forecasting annual real estate appreciation at the rate of 11.4 to 12.1 percent nationally.

That appreciation rate, however, can cause confusion because homeowners and buyers don’t always understand the specific items tracked.

“The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices,” writes Stan Humphries, chief economist for Zillow, “not just because of market improvements, but also because the sales are no longer distressed.”

In contrast, other reporting firms track more down-to-earth metro areas and do not include foreclosure resales.

That more modest approach could better explain why a town like Norwalk last saw average home value highs of $133,000 in October 2011 with the most recent low point reaching $85,000 just twelve months later. Year-over-year home values were still down in the area nearly 8 percent in April 2013. Using Zillow’s approach instead of Case-Shiller’s, Norwalk area homeowners should expect only to see low single-digit percentage increases in home values during the next year.

The good news? Most markets have already hit a bottom, states Zillow. Sixty-five out of the 251 markets it covers are forecasted to experience home value appreciation of 4 percent or higher.

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