• REAL LIFE MONEY
• NOVEMBER 13, 2011

How to Figure the Fuzzy Math of Internet Home Values

By ALYSSA ABKOWITZ

Jason Gonsalves worked hard to turn his 6,500-square-foot stucco-and-stone home in the suburbs of Sacramento into the ultimate grown-up party pad, complete with game room, custom wine cellar and an infinity-edge pool overlooking Folsom Lake. When interest rates fell recently, Mr. Gonsalves, who runs a lobbying firm, looked into refinancing his $750,000 mortgage. That's when he got startling news—the home had dropped more than $200,000 in value while he was renovating.

Or at least, that's what one real-estate website told him. Another valued the house at only $640,500. And these online estimates left him all the more confused when a real-life appraiser, assessing the house for the refinancing loan, pinned its value at $1.5 million. "I have no idea how those numbers could be so different," Mr. Gonsalves says.

Right or wrong, they're the numbers millions of consumers are clamoring for. After years of real-estate pros holding all the informational cards in the home-sale game, Web-driven companies like Zillow, Homes.com and Realtor.com are reshuffling the deck, giving home shoppers and owners estimates of what almost any home is worth. People have flocked to the data in startling numbers: Together, four of the biggest sites that offer home-value estimates get 100 million visits a month, with web surfers using them to determine what to ask or bid for a home, or whether to refinance.

Zillow, Trulia and other websites post estimates of home values. But as Alyssa Abkowitz explains on Lunch Break, these popular sites can be -- by their own admission -- wildly inaccurate.

But for figures that can carry such weight, critics say, the estimates can be far rougher than most people realize. Valuations that are 20% or even 50% higher or lower than a property's eventual sale price are not uncommon, as the sites themselves acknowledge. The estimates frequently change, too—sometimes by hundreds of thousands of dollars—as sites plug new data into their algorithms.

• What the Sites Get Right and Wrong

All of the competitors make it clear their numbers are guesstimates, not gospel. "A Trulia estimate is just that—an estimate," says a disclaimer on that site's new home-value tool. Zillow goes a step further, publishing precise numbers about how imprecise its estimates can be. And every major site urges home-price hunters to consult appraisers or real-estate agents to refine their results.

But despite the disclaimers, homeowners and real-estate agents say, many Web surfers put enough faith in the estimates to sway the way they shop and sell.

After Frank and Sue Parks put their manor-style house in Louisville, Ky., on the market, they watched as Zillow put a $331,000 value on the dwelling in May; by July it had climbed to $1.5 million. (Zillow says the lower estimate reflected errors in its statistical model.) The couple got potential buyer referrals from the site, but they fended off a stream of lowball offers before they sold this fall. Mrs. Parks says the estimate roller coaster "really affected our ability to move the place."

Determining a home's value has traditionally been the job of an appraiser, who gathers data on recently sold homes and compares them with the "subject property" to arrive at an estimate.

In the late 1980s, economists started developing automated valuation models, or AVMs, computer models that could analyze data about comparable sales, square footage, number of bedrooms and the like, in a matter of seconds. For years, these tools were mostly reserved for in-house analysts at lending banks.
It wasn't until 2006 that Zillow took them to the masses, with its Zestimates, which now offer values for more than 100 million homes based on the company's own algorithms. "Humans don't make these decisions," says Stan Humphries, chief economist at Zillow.

Numbers like these have become weapons in the arsenal of consumers like Simms Jenkins, an Atlanta marketing executive, who has recently relied on online estimates to help him both buy and sell homes. "I can't imagine 25 years ago, when people would just go out and spend their entire Saturday looking at homes," he says. "You don't have to do that now."

But appraisers and real-estate consultants say the online models can veer off target with alarming frequency. Most data for the models come from two sources: records from tax assessors and listing data for recent sales. Collection is a challenge, however, because not every county tracks properties the same way—some calculate home size by number of bedrooms, others by overall square footage. And automated models aren't designed to account for the unique construction details that often make or break a deal, or for intangible factors like a neighborhood's gentrification. "You cannot use a computer model in certain areas and expect the value to come out right," says John May, the former assessor of Jefferson County, Ky., which includes the state's largest city, Louisville.

For all these reasons, models that banks use often add a "confidence score" to their estimates. Consumer-oriented sites, meanwhile, rely on disclaimers, some of which are eye-opening. Zillow surfers who read the "About Zestimates" page find out that the site's overall error rate—the amount its estimates vary from a homes' actual value—is 8.5%, and that about one-fourth of the estimates are at least 20% off the eventual sale price. In some places, the numbers are far more dramatic: In Hamilton County, Ohio, which includes Cincinnati, it's 82%.

The sites argue that, over time, edits and corrections will help them perfect their numbers—with many fixes coming from their customers.

On Homes.com, anyone who knows a homeowner's surname and the year the home was last purchased, can edit the details of a property listing in ways that can eventually change the estimated value.

Zillow has accepted revisions on 25 million homes—perhaps the strongest testament to how seriously consumers take its estimates. Today, the site says its figures are accurate enough to give consumers a good sense of any home's value. In the meantime, says Mr. Humphries, its economist, "We're always tweaking the algorithm or building a new one."

Mortgage aid open to more Calif. borrowers             

A state-run program that helps homeowners struggling to pay their mortgages now has broader eligibility guidelines, opening up help to borrowers who did "cash-out" refinances and own multiple properties, said California Housing Finance Agency officials on Monday.

The mortgage-aid effort, called Keep Your Home California, so far has helped close to 8,000 low- and moderate-income households that are behind on loan payments or close to default, according to agency leaders.

"This expanded eligibility will allow more families to qualify and receive greater assistance," said California Housing Finance Agency Executive Director Claudia Cappio, in a statement. "We are continuously evaluating our experience so far and making adjustments like these based on the initial results of the Keep Your Home California program."

Keep Your Home California has four parts that include: mortgage help for the unemployed, mortgage aid for homeowners with documented financial hardship, relocation help for those in the midst of a short sale or deed-in-lieu of foreclosure, and reduction of principal. The programs, paid for by the U.S. Treasury Department's Hardest Hit Fund, is costing taxpayers $2 billion.

Monday's announced changes include:

--Allowing homeowners who completed "cash-out" mortgage refinancing to take part in the four programs. Such borrowers were excluded before.

--Allowing borrowers who own more than one property to apply. Program officials said this will be particularly helpful to those who co-signed on properties for family members.

--Offering mortgage aid to unemployed borrowers for nine months, instead of six. Such homeowners can get up to $3,000 a month. To qualify, you must receive unemployment benefits.

--Reinstating up to $20,000 in past-due mortgage payments instead of the previous $15,000 cap.

To qualify, your mortgage servicer must take part in Keep Your Home California. Click here for the list of servicers.

Info: Call 888-954-KEEP(5337) between 7 a.m. and 7 p.m. Monday through Friday, and 9 a.m. to 3 p.m. on Saturdays. Visit: http://www.keepyourhomecalifornia.org/ or 
http://www.conservatucasacalifornia.org/.

Reported by reporter Lily Leung at lily.leung@uniontrib.com or 619-293-1719.

October 27, 2011

Handling High Closing Costs

By VICKIE ELMER

WHEN you add everything up, closing costs can increase the price of a home by as much as $10,000, sometimes more.
Those who are cash-poor can ask relatives for help. But some lenders advertise another option: If borrowers agree to accept a mortgage interest rate from a quarter to a full percentage point higher than they would ordinarily qualify for, they can receive credit toward their closing costs.
 Such mortgages are sometimes called no-closing-cost loans, though the term is misleading. The credit usually covers only fees charged by the mortgage broker or bank, like the loan origination fee, the underwriting expense, and the appraisal, according to Neil Diamond, a mortgage broker in Commack, N.Y.  That generally leaves title insurance, mortgage-recording taxes, insurance and escrowed taxes to cover, he said.
The amount of credit depends on total closing costs and other loan details. A rule of thumb is that for every one-eighth of a point increase in interest rate, borrowers receive a credit worth half a percentage point of the principal amount, said Jason Auerbach, a divisional manager for First Choice Loan Services in Manhattan. On a $400,000 30-year mortgage with a 4.125 percent base rate, the first one-eighth of a point increase would yield a $2,000 credit and so would the second, but the credit for the third would drop to about $400, he said, noting that some lenders set a 5.25 percent ceiling on rates.
With mortgage rates so low, Mr. Auerbach said, interest in “no-closing-cost” loans has increased.
While these mortgages can be helpful to some, borrowers should carefully review all the details. “It’s a sales technique,” Mr. Diamond said. “It can be positive and negative.”
The main downside, of course, is that the higher rate and monthly payment remain in place through the life of the loan. Therefore, Mr. Diamond said, borrowers must ask themselves what they can really afford.
Mr. Diamond suggests doing a side-by-side comparison of loans with and without the credit. If you were paying around $50 a month extra in interest charges to cover, say, $6,000 in closing costs, it would take you 120 months, or 10 years, before you began to pay more in monthly payments than you were saving on closing costs. So if you stayed in the home for seven to eight years — the national average in recent years, according to the National Association of Realtors — you would come out ahead with the higher rate.
But a higher mortgage payment with more going toward interest and less toward principal repayment could lead you to a higher debt-to-income ratio, Mr. Auerbach pointed out. This might affect some borrowers’ ability to qualify for the loan, or might leave them with less money for home improvements or purchases after they moved in.
Even so, a “no-closing-cost” loan can be useful for anyone who has found a home and does not want to wait to save thousands of dollars more to cover all the closing costs. It also can be worthwhile for “people who would rather hold onto their money,” Mr. Diamond said.
Nationwide, total closing costs on a $200,000 mortgage average $4,070, according to a recent survey from Bankrate.com. That represents an 8.8 percent increase over last year, and reflects higher lender fees. New York’s closing costs averaged $6,183, the highest in the nation. In New Jersey the average was $4,589; and in Connecticut, $3,843, according to Bankrate.com.
Closing costs can be much higher on more expensive homes. Dianne Scalza, an associate broker with Netter Real Estate on Long Island, says that buyers in the West Islip area, for instance, typically pay $12,000 to $17,000.
Co-op owners may also benefit from the raise-the-rate approach when it comes to refinancing. Because the loan balance does not change, they most likely will not need board approval for a new mortgage, Mr. Auerbach said.