The difficulties homeowners face today obtaining accurate valuations of their homes, and in turn, the equity they have in it, may be freezing many out of refinancing or selling because they error on the side of caution and make estimates that are too conservative.
A new analysis of Fannie Mae’s National Housing Survey by two economists at the University of California, Berkeley found homeowners believe that large down payments are now required to purchase a home, then widespread, large underestimates of their home equity could be deterring them from applying for mortgages, selling their homes, and buying different homes.
The economists suggest that even though house prices have risen noticeably between mid-2011 and the fourth quarter of 2014, house prices rose about 20 percent, homeowners’ perceptions have not kept pace with marketplace reality.
Using data from CoreLogic and the National Housing Survey’s nationally representative sample of U.S. adults, the Berkley researchers, Steve Deggendorf and Professor James A. Wilcox, calculated the percent of mortgaged households who perceived that they were underwater. The NHS asks homeowners how much they are underwater or above water by having them compare their total mortgage debt (the total of their first mortgage, second mortgage, and HELOC balances) to the values of their homes. During NHS telephone interviews, homeowners rely on their perceptions of their homes’ values and their mortgage balances. Unlike respondents to online and mail surveys, NHS respondents have no opportunity to review their personal records or search for data. Presumably, homeowners have or have not acted on the basis of their prevailing perceptions, rather than on perceptions that are revised in light of further consideration of personal or public information.
Through the end of 2011, the percent of mortgaged homeowners in the NHS who perceived they were underwater averaged about 6 percentage points more than those estimated by CoreLogic. House prices declined on average from the middle of 2007 through the middle of 2011. The 5 ½ percent decline in house prices from Q2 2010 through Q2 2011 was accompanied by little change in both the percent of homeowners who perceived they were underwater and those estimated to be underwater, perhaps due to homeowners continuing to reduce their first- and second-mortgage balances.
The significant increases in house prices between 2012 and 2014, as expected, significantly reduced the percent of homeowners estimated by CoreLogic to be underwater. From the end of 2011 to the end of 2014, the estimated percent more than halved, falling from 21 percent down to 9 percent.
But NHS data paint a strikingly different picture. Despite the 20 percent rise in house prices, approximately the same number of homeowners (23 percent) perceived that they had negative equity at the end of 2014 as those who perceived that they had negative equity before prices rose 20 percent (26 percent on average in 2011). Surprisingly, then, the significant rise in house prices was not perceived to lift many homeowners above water.
Figure 2 shows quarter-to-quarter (annualized) changes in house prices. Following four years of declines, house prices rose at (annualized) rates of between 4 and 9 percent after Q1 2012.
Figure 3: Homeowners Who Were Underwater: Estimated vs. Perceived
(CoreLogic estimates were based on data for the end of each quarter, NHS perceptions were based on data for the last month of each quarter)
The solid black line in the figure above shows the CoreLogic estimates of the percent of mortgaged homeowners who had significant (20 percent or more) equity in their homes. The blue dashed line shows the percent of mortgaged homeowners in the NHS who perceived that they had significant equity in their homes.
The percent of homeowners estimated by CoreLogic to have significant home equity always was much higher than the percent who perceived themselves as having significant equity. CoreLogic estimated it to be 53 percent in June 2010, compared with only 32 percent of respondents in the NHS in June 2010.
Second, the gap between the percent of homeowners estimated to have significant home equity and the percent who perceived they had significant home equity also rose as house prices rose. By the end of 2014, while only 37 percent of mortgaged homeowners in the NHS perceived that they had more than 20 percent home equity, CoreLogic estimated that 69 percent had significant home equity.
CoreLogic’s estimates reflect that rising house prices not only lifted many homeowners above water, but also lifted many homeowners into having significant home equity. Similar to Figure 3, Figure 4 shows that homeowners’ perceptions of whether they had significant home equity diverged from estimates of whether they had significant home equity. Despite the significant rise in house prices after 2011, the percent of homeowners who perceived they had significant home equity was almost unchanged—just as the percent who perceived they were underwater was almost unchanged. The 37 percent of homeowners who perceived at the end of 2014 that they had significant home equity had edged up only a little from its 2011 average of 35 percent.
One possible explanation for the divergence is that a substantial group of homeowners may not recognize how much the values of their homes rose after 2011. And, even if they recognized that their homes’ values had increased, many homeowners may underestimate how much their homes’ values and home equity increased.
NHS data suggest that homeowners have misperceived recent actual house price changes. During the third and fourth quarters of 2013, the NHS asked homeowners each month whether and how much the values of their homes had gone up or down over the prior 12 months. The national averages of their responses during the third and fourth quarters of 2013 were 2.2 percent and 2.7 percent, respectively. But, the national FHFA home price index shows that, over the prior four quarters, home values actually rose by 8.2 percent and 7.6 percent, respectively. Thus, homeowners seriously misperceived these recent actual house price increases. They perceived only about one-third of the actual percentage increases, in this case implying that, on average, they did not perceive additional home equity equal to 5 percent of their homes’ values.
We have some corroboration that homeowners failed to perceive how much home values had risen. Since the NHS began in June 2010, consumers’ expectations of house price changes have consistently been lower than actual changes. Analysts have long contended that consumers’ expectations of home price changes largely reflect their perceptions of recent actual home price changes. Expectations may sensibly stem from the strong autocorrelation in house price changes. Consumers’ low expectations for home price changes may well reflect perceptions that recent actual house price changes were low. If so, consumers’ perceptions of recent actual home price changes were considerably lower than actual house price changes during 2012 and 2014.
Not perceiving how much home values, and thus home equity, went up would produce widening gaps between estimated and perceived home equity. Discerning whether homeowners’ perceptions caught up with estimated home values or fell further behind rising house prices is problematic. The widening gaps in Figures 3 and 4, however, indicate that homeowners may have increasingly misperceived their gains.
Homeowners who underestimate their homes’ values not only underestimate their home equity, they also likely underestimate 1) how large a down payment they could make with their home equity, 2) their chances of qualifying for mortgages, and, therefore, 3) their opportunities for selling their current homes and for buying different homes.
Thus, a “negative perception gap” or an “appreciation gap” may be an important, but removable, impediment in housing and mortgage markets. At the end of 2014, the gap between the estimated and perceived percent of mortgaged homeowners who had significant home equity was 32 (= 69-37) percentage points, which amounts to approximately 15.2 million homeowners. Credibly informing an additional 15 million homeowners that they have 20 percent or more equity would remove the appreciation gap and, thus, a perceived, but artificial, barrier that may inhibit many interested homeowners from purchasing another home nearby or from moving to advance their job and career prospects.
“The appreciation gap presents a potential opportunity. It is an opportunity to remove a barrier that may have hindered housing and mortgage market activity. It is an opportunity that does not require changes in laws or regulations. It does not require additional subsidies by business or government. Costs to close the gap can be low,” the authors wrote.
Providing homeowners with information and with tools so they can better estimate their home equity may help shrink the gap. Delivering easy, affordable access to better estimates of home values (and perhaps of total debts, too) could afford many benefits. Better equity estimates may promote better choices of houses, mortgages, neighborhoods, jobs, spending and saving, and lifestyles.
Online estimates of home values are widely known and freely available. How credible and accurate the currently available estimates are is an open question. Accurate equity estimates require accurate liability, as well as asset, values, and homeowners having affordable access to their mortgage balances. It is hard to know whether homeowners consider their access to be easy and comfortable. Just as homeowners may misperceive the values of their home assets, they may misperceive their mortgage liabilities. If so, those misperceptions might account for some of the appreciation gaps in Figures 3 and 4. As of now, we have no evidence of misperceptions of mortgage balances. But, if substantial numbers of homeowners underestimate amortization, for example, providing them with easy, affordable access to information and tools might be easy and affordable.
“Either the private sector or the public sector could provide information and tools to shrink the appreciation gap. Shrinking the gap is geared not to encourage leverage and unsustainable behaviors, but to help homeowners have more accurate estimates of their home equity. Better appreciating how much their assets have appreciated ought to strengthen homeowners’ demand for housing, as well as their demands for other goods and services. Thus, in addition to the opportunity to help homeowners on an individual basis, shrinking the appreciation gap presents a potential opportunity to speed up the recovery of the housing and mortgage markets, better match workers with jobs, and strengthen the economy generally,” they concluded.
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