Zillow was a much clicked-on Web site after its 2006 debut, when homeowners were gleefully rubbing their hands together about their property’s escalating value before the housing bubble burst.

Even then though, there were questions about the accuracy of Zestimates, Zillow’s estimates of property value based on public records, local real estate listings and sales information. Now a trio of professors at the University of Texas at San Antonio are adding their voice to the conversation.

Their harsh conclusion: Zillow not only overvalues properties but homeowners’ own estimates might be more realistic than Zillow.

The study, thought to be the first look by academia at Zillow and its proprietary formula for determining home value, focused on 2,045 homes in the Arlington, Texas, area sold in the second half of 2006. The research found that for 40 percent of the homes in the sample, Zillow ovestimated the value by more than 10 percent, and only 0.88 percent of property values were underestimated by more than 10 percent. The study was published in the winter edition of The Appraisal Journal, a trade publication of The Appraisal Institute.

The findings have been lambasted by Zillow, which faults the study for being conducted three years ago, focusing on only one city, and comparing sales for one time period and Zestimates a few months later. “It’s unfortunate this limited study is being published and publicized so far out of date,” said Zillow spokesman Jill Simmons in an e-mail. “It’s also unfortunate that they did not reach out to Zillow to learn more about our approach to home valuation for this study. We would have been happy to talk to them as we are very open and transparent about both our accuracy and the intended use of Zestimates as a starting point for learning about home values.”

Finance professor Ron Rutherford, one of the study’s authors, said the Arlington real estate market was purposely picked because it was a stable real estate market and Zillow gave it four stars, its best rating for accuracy. Also, the researchers first collected sales data on the properties from the multiple listing service and then looked up their Zestimates several weeks later because they waited for sales to be recorded and then gave Zillow a month to update its Zestimates to factor in sales data.

Rutherford stands behind the findings. In fact, he says Zestimates are likely to be off even more in unstable housing markets like those found around the country right now. “My guess is when you’re using an automated system, it’s going to be difficult to get close when the market changes,” he said.

For its latest reporting period ended June 30, Zillow’s site gives its Zestimate accuracy for the Chicago metropolitan area three stars, a “good” rating, saying that 70 percent of its Zestimates are within 20 percent of the sale price, with a median error of 11.5 percent. That means half of the Chicago-area home Zestimates are within 11.5 percent of the selling price and half are off by more than 11.5 percent.

What’s the authors’ takeaway from their research?

“Homeowners overestimate 5 to 8 percent,” Rutherford said. “Part of our point was to say you probably know the estimate of your home as well as any of these automated systems can tell you.”

Zillow does note on several places within its site that the property value it puts on a house is a starting point for determining a home’s value, not an appraisal. The authors acknowledge that but undertook the study because they knew so many homeowners were using Zillow to judge their home’s worth.

ChicagoTribune

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The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven’t benefited from that because they can’t—or won’t—refinance.

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

“Traditionally, these borrowers would be aggressively refinancing,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That’s money consumers can potentially use to help spur economic recovery.

About a quarter of all mortgage holders are “underwater”—they owe more on the house than it’s worth—which normally makes it impossible to get refinancing: Banks want collateral to back the value of home loans they make. The Obama administration recently extended a program intended to help underwater homeowners refinance, but few people have tapped it so far. The program has faced logistical hurdles, delays and confusion from brokers and lenders.

Some people are so far underwater, refinancing ends up being out of the question. John Albright, a retired Navy officer in Manassas, Va., hasn’t been able to refinance because the value of his home has plunged. He figures its market value is now around $275,000, but he and his wife still owe more than $500,000 on their mortgage.

Their refinance application was turned down last year because they lacked equity in the home. He says his lender told him he could refinance only if he could come up with about $200,000 to pay down his mortgage. So they are stuck with an interest rate of about 6.5% at a time when his wife’s income has declined. “We’re going from paycheck to paycheck, but what can you do?” Mr. Albright says.

Some mortgage bankers say higher fees by lenders have undermined the effort to encourage refinancing. Fees that Fannie and Freddie began imposing in 2008, as loan delinquencies began to rise, have made it unattractive for some borrowers to refinance. For example, a borrower with 20% down and a 695 credit score seeking to refinance must pay fees equal to 1% of the loan amount. Those fees rise for borrowers with weaker credit scores, higher loan-to-value ratios, or other risk factors.

Overcorrecting for the abuses of financial institutions “has defeated the Fed’s purchase program,” said Alan Boyce, a mortgage-securities-market veteran. Those loan fees, he said, are partly “responsible for why there’s been no refi boom.”

The higher fees and tight credit standards show the tensions facing Fannie and Freddie. As the government-controlled companies try to raise revenue to offset their losses, those efforts can conflict with their basic public-policy mission: to help stabilize the housing market.

Fannie and Freddie have to strike a balance between risk and access to credit. Figuring out “where that line is involves some trade-offs,” said Edward DeMarco, acting head of the Federal Housing Finance Agency, which oversees Fannie and Freddie.

The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.

Traditionally, borrowers have an incentive to refinance when they can reduce their mortgage rate by one percentage point or more.

Borrowers who are refinancing tend to be those who need it least. Fannie and Freddie refinanced 4.2 million borrowers last year. On average, borrowers who refinanced through Freddie Mac saved $2,600 annually. But the savings on the whole have gone to “very, very good credit borrowers and it really isn’t going very far down the credit spectrum,” said Michael Fratantoni, the head of research and economics for the MBA.

The experience of Connecticut resident Cathy Grandahl shows some of the trade-offs borrowers must grapple with in today’s low-interest-rate, high-fee environment. She wanted to refinance two loans on her West Simsbury, Conn., home: a fixed-rate mortgage with a 5.75% rate and a second mortgage with an adjustable rate that she worries will rise sharply in coming years.

Refinancing would save them around $125 a month on their first mortgage while providing a fixed rate on their second loan. But extinguishing that mortgage by refinancing into one larger loan—considered a “cash-out” refinance—would trigger an additional fee. That, plus several thousand dollars in closing costs, ultimately persuaded the couple not to refinance after all.

About a quarter of all mortgage holders are “underwater”—they owe more on the house than it’s worth—which normally makes it impossible to get refinancing: Above, homeowners work with Bank of America negotiators to restructure their mortgage loan during a “Save the Dream” tour stop by the Neighborhood Assistance Corporation of America last month in Palm Beach, Fla.

“It’s not a matter of our credit. We just can’t get a good enough rate to make the refi worth it,” says Ms. Grandahl, a 53-year-old land-records researcher who has three children in college.

Her broker, Michael Menatian, said that sort of scenario “happens all the time” with qualified borrowers. “There’s nothing wrong with these people—good equity, good income—and you have to tell them, ‘I’m sorry, I can’t give you the low rate you thought you could get.’ ”

Falling home values are one of the biggest factors raising borrowers’ refinancing costs. Borrowers with less than 20% equity may have to pay for mortgage insurance.

On Monday, the Obama administration said it would extend for a year a program launched last April to help homeowners with little or no equity to refinance. That program, which had been set to expire this June, was called a “failure” last week by analysts at Barclays Capital. While the administration had said it would benefit millions, so far just 188,000 borrowers who owe between 80% and 105% of the value of their homes had refinanced through December. Last September, it was expanded to include borrowers who owe up to 125% of their home value, but fewer than 2,000 borrowers have used that program through December.

The administration says it is also considering new ways to allow distressed homeowners to refinance through the Federal Housing Administration.

WSJ.com

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Thinking of cashing out some equity when you refinance your mortgage? Sure, that used to be what millions of homeowners did when they needed extra money.

But now get ready for the post-boom, post-crash trend: “cash-in” refis — the opposite of cash-outs.

“It almost sounds un-American,” quipped Frank Nothaft, chief economist for mortgage giant Freddie Mac. After all, Americans have grown accustomed over much of the last two decades to tapping into their equity — pulling out a chunk of cash and adding to their debt load — when they refinanced their mortgages. “Almost nobody thought of putting money back in.”

Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.

This meant that nearly 9 out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5% in the process. It was the heyday of the pile-on-more-debt mind-set — cash me out, I can’t lose on my real estate — that came crumbling down in 2007 and 2008, when home equity holdings shrank drastically and painfully.

From 2005 to the third quarter of 2009, according to Federal Reserve estimates, American homeowners lost $7 trillion in equity — an unprecedented evaporation of household wealth. Almost nobody was spared.

Now the pendulum in consumer psychology appears to be swinging toward reduction of household debt — whether on credit cards or mortgages.

In Freddie Mac’s latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever. By contrast, only 27% of refinancers took cash out — the lowest percentage on record.

Why shift money from savings into your house? Nothaft says a small percentage of refinancers — including himself and his wife — traditionally have preferred to lower their mortgage balances whenever possible.

There are at least two key rationales for doing so, Nothaft says. No. 1: If interest rates are low and you’re getting minuscule returns on your bank savings or money market funds, paying down your home loan may well provide you a better return on your investment.

For example, in early 2009, Nothaft and his wife chose to lower their mortgage balance at the same time they were refinancing. “We thought, hey, this is a no-brainer,” Nothaft recalls. “We can get a 4 3/4 % return instead of close to zero” on checking accounts and bank deposits.

A second reason to consider a cash-in refi would be to qualify for a better interest rate and terms on the replacement mortgage.

Say you have a loan-to-value ratio above 80% and any refi of the current balance will require payment of private mortgage insurance premiums and possibly come with a higher rate.

But if you have some money that you could devote to lowering the principal balance — cashing in — you might be able to cut your LTV to 75% or less and get a more favorable interest rate and avoid mortgage insurance premiums.

Cash-ins, in effect, are a disciplined form of saving — one that in today’s depressed rates for competing types of savings might be an astute financial move.

Nothaft isn’t sure whether the recent jump in cash-in refis is the start of a long-term societal shift. But there has been a steady rise since the fourth quarter of 2007, when cash-ins hit 9%, up from just 5% of all refis earlier that year.

By early 2009, they accounted for 13% of refinancings, then grew to 18% in the third quarter. After that, cash-ins jumped to 33% in the final three months of 2009.

“It may well be a reaction to higher credit standards by lenders” — making cash-outs and refis in general tougher to get — or “some decision on the part of many people to be a little more conservative in uncertain times,” Nothaft said.

A cash-in refi is hardly an option for everyone. But with mortgage rates widely predicted to rise from 5% at present for a 30-year fixed-rate loan to the mid- to upper-5s as the year progresses, the numbers just might work for you if you have the resources.

L.A. Times

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NEW YORK (Reuters) – Hedge fund firm Pine River, which makes big bets on housing, is bracing for a double dip in that market, its chief executive officer said on Tuesday.

“There are still issues in the housing markets and it would not surprise us to see the recovery turn down,” Brian Taylor, who founded the $1.6 billion hedge fund eight years ago, said at the Reuters Private Equity and Hedge Funds Summit in New York.

For Pine River, where Taylor and his seven partners work to identify relative value mispricings ahead of the curve, both a full-fledged recovery or a double-dip recession would provide a chance to make money for clients, Taylor said. “There is opportunity to profit either way.”

Last year, Pine River gained about 90 percent, far more than the average hedge fund’s roughly 20 percent return.

As Taylor sees it, the market for residential mortgage-backed securities turned from dull to exciting virtually overnight during the financial crisis, leaving his team with large opportunities that few others seek now.

“The amount of risk has never been greater,” he said. “Armageddon was avoided in late 2008 and 2009,” but the housing finance market is still awful, he said, with millions of homeowners sitting on liabilities that exceed their assets.

“Today there are still pockets of undervaluation left over from 2008,” Taylor said.

Additionally Pine River is benefiting from a lack of competition thanks to the retreat of government-controlled mortgage buyers Freddie Mac (FRE.N) and Fannie Mae (FNM.N) from relative value investing in the RMBS market.

(Reporting by Svea Herbst-Bayliss. Editing by Robert MacMillan)

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If the Oracle of Omaha, Warren Buffet, is correct the residential real estate market will rebound in 2011. Buffet, in his letter to Berkshire Hathaway stockholders, thinks that the demand curve will turn at that state and the residential markets will start to improve.

I am sure this news is not what real estate agents are hoping to hear, I tend to agree. The housing market still has way to much overhang from foreclosures and short sales for buyers to have confidence investing in homes. Add to that a nervous economy, it would be foolish to think that all will be okay this summer.

So real estate agents, tighten that belt and continue to build your systems this year, so you are ready for 2011.

“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote Saturday in his annual letter to the shareholders
of his Berkshire Hathaway. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.”

Record foreclosures flooded a U.S. real estate market already glutted with unsold property, causing housing starts to fall.

“People thought it was good news a few years back when housing starts — the supply side of the picture — were running about 2 million annually,” wrote Buffett, 79, chairman and CEO of Omaha-based Berkshire. “But household formations — the demand side — only amounted to about 1.2 million.”

The Real Estate Bloggers

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By ALAN ZIBEL
The Associated Press
Thursday, February 25, 2010; 3:48 PM

WASHINGTON — Lawmakers are taking aim at the Obama administration’s struggling mortgage assistance program, with Republicans calling it a worthless exercise and Democrats saying it doesn’t go far enough.

In a report Thursday, Reps. Darrell Issa, R-Calif. and Jim Jordan, R-Ohio., called the program a misuse of taxpayer money. Though $75 billion has been set aside for the program, so far only $15 million has been spent.

They also said it distorts the housing market by keeping people in their homes who would be better renting.

“Many Americans are throwing their money into homes that they believed the government would help them keep, only to find out thousands of dollars later that they will face foreclosure anyway,” Jordan said at a House hearing.

Obama administration officials, however, say the program gives a second chance to homeowners who were given shoddy loans during the housing boom. And they defend their track record, even though only 116,000 homeowners have completed the process out of the 1 million enrolled since the program’s launch last March.

While “challenges remain”, the program “is helping homeowners who have faced real financial hardship,” said Phyllis Caldwell, chief of the Treasury Department’s homeownership preservation office.

Democrats, however, argued that the Treasury Department needs to put more pressure on the lending industry to reduce borrowers’ outstanding principal balances

The program is designed to lower borrowers’ monthly payments by reducing mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. To complete the process, homeowners need to make three payments and provide proof of their income, plus a letter documenting their financial hardship.

But experts warn that hundreds of thousands of borrowers will not complete the process because they are found to be ineligible during an initial trial phase. Housing counselors complain that many homeowners remain stuck in limbo without final word on their applications

Treasury officials acknowledge that the treatment of borrowers under the program has been a problem. They have been working on new consumer protections such as giving those rejected from the program 30 days to appeal the decision and barring lenders from lenders continuing with foreclosures while homeowners were being evaluated for help.

Last week, President Barack Obama announced that housing agencies in Arizona, California, Florida, Michigan and Nevada will receive $1.5 billion in financial rescue money. The funds will go to local programs to help unemployed homeowners, “under water” borrowers who owe more than their home is worth, or pay lenders to assist borrowers with second mortgages.

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By MARTIN CRUTSINGER

The Associated Press

4:20 p.m. Wednesday, February 24, 2010

WASHINGTON — Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who were expecting a 5 percent increase over December’s pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

“There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that doesn’t take away from the fact that the housing sector has taken another big step back, even with the government aid,” Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

A rebound in housing in the second half of last year helped to boost overall economic growth back into positive territory. Each new home built, for example, creates about three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.

However, economists are worried that if housing falters in coming months, that will be one more headwind the recovery will have to overcome. The decline to an annual purchase rate of 309,000 in January was 6 percent below the previous record low set in January last year.

“I don’t think we are going to have a double-dip recession in housing, but it is going to take us longer to recover from a very deep hole,” said Patrick Newport, an economist at IHS Global Insight.

January’s weakness was evident in all regions except the Midwest, where sales posted a 2.1 percent increase. Sales were down 35 percent in the Northeast, 12 percent in the West and almost 10 percent in the South.

The drop in sales pushed the median sales price down to $203,500. That was down 5.6 percent from December’s median sales price of $215,600, and off 2.4 percent from year-ago prices.

New home sales for all of 2009had fallen by almost 23 percent to 374,000, the worst year on record. The National Association of Home Builders is forecasting that sales will rise to more than 500,000 sales this year, an improvement from 2009 but still far below the boom years of 2003 through 2006 when builders clocked more than 1 million new home sales per year.

January’s data increased concerns that the housing rebound could falter in coming months as the government withdraws the support it has used to try to bolster the housing market. The real estate crisis was the epicenter of the country’s overall recession, the worst downturn since the 1930s.

The Federal Reserve has been holding down mortgage rates by buying $1.25 trillion in mortgage-backed securities, but that program is set to end March 31. And temporary tax credits to bolster home buying are scheduled to expire at the end of April.

Federal Reserve Chairman Ben Bernanke told Congress Wednesday that by holding the securities on its books the central bank would continue to help keep mortgage rates low. Economists believe that as long as the Fed owns the securities it will reduce the overall supply and thus help support the price.

Bernanke, delivering the Fed’s twice-a-year economic report to Congress, said that the Fed’s record low interest rates were still needed to attack high unemployment levels and help the overall economy recover.

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A combination of weather and low demand has led to a 13 year low in demand for mortgage applications according to The Mortgage Bankers Association. Demand for mortgages has not been this low since 1997.

Hopefully the market slowdown is a statistical blip due to the harsh winter that so much of the country has been dealing with. Unfortunately the uncertainty of the market and economy has all of us scoreboard watching. The demand for new mortgages is the canary in the coal mine for the real estate industry.

If mortgage applications drop typically closing are not on the horizon.

A continued drop in demand for purchase loans, a tentative early indicator of home sales, would not bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association reported an 8.5 percent decline in its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended February 19.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 1.6 percent.

The MBA’s seasonally adjusted purchase index fell 7.3 percent, the lowest level since May 1997.

The Real Estate Bloggers

A Look at Case-Shiller, by Metro Area (February Update)