Why you should ignore the Zillow report on underwater homeowners

Of the two dozen or so news things I read daily, at least three had a headline to the effect of “Zillow sez a third of mortgaged homes underwater.” Waily, waily, waily. (Here’s Housing Wire’s. Here’s ABC’s. Here’s CNN’s. Here’s Business Week’s.)

The two reasons why you should just shake your head and ignore it:

Underwater homeowners 1. Being underwater isn’t the same as “nearing foreclosure” or even “behind in payments.” If you bought a house (especially a first one) in the past few years, there’s a good chance you’re underwater. Most of your payments go to interest, and if values drop then on paper you owe more than the home is worth. So what? If you don’t need to sell, it doesn’t matter.

I bought my home in December. Technically I’m now underwater, at least by a little. So? That doesn’t change my payments, nor my ability to pay, nor the value of the house to me.

A more useful figure would be “Percent of homeowners who are A) underwater, B) have trouble making payments, and C) feel they will need to move in the next 24 months.

Heck, even “Percent of homeowners who are underwater by more than 10 percent of their homes’ value” would give a better picture.

It's zesty... but maybe not accurate2. That number is based on Zillow’s “Zestimate” of the home’s value. Its connection to reality is tenuous at best.

Ah, you say, but even a stopped clock is right twice a day (unless it’s digital). But CoreLogic also looked at homeowners and mortgages. And while Zillow says that 31.4 percent are underwater, CoreLogic found that the number was closer to 23 percent. And reason #1 still applies.

Zillow could certainly be right, and a large number of those underwater owners may suddenly have the need to sell, resulting in short sales and foreclosures and the End Times. But chances are the number is only useful to make headlines.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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2 Responses to Why you should ignore the Zillow report on underwater homeowners

  1. Hi Andrew — Katie from Zillow here. Just wanted to weigh in on the negative equity numbers.

    Your first point is right on. For an individual, being underwater absolutely does not equate to nearing foreclosure, or being delinquent. In fact, we called out the following two facts at the very top of our press release, and we think they are incredibly important to understand:

    • Foreclosure is not imminent for most underwater homeowners. Nine out of 10 continue to make their mortgage and home loan payments on time, with only 10.1 percent more than 90 days delinquent.

    • Many homeowners in negative equity are not deeply underwater. Nearly 40 percent of underwater homeowners owe between 1 and 20 percent more than their home is worth. However, 15 percent of underwater homeowners – approximately 2.4 million – owe more than double what their home is worth.

    As for your second point, just a little background on methodology. This is the first time we’re releasing negative equity with our new methodology. We’re working TransUnion, a credit agency, to figure out exactly how much debt homeowners CURRENTLY have against their homes. We then compare those to the Zestimate, which is Zillow’s automated valuation model (AVM). Because we track the accuracy of Zestimates, we know they are as likely in a given region to be low as they are to be high, so when we look at the aggregate data, it is very accurate.
    Ours is the only report that looks at current, actual outstanding loan amounts. Our old methodology, like CoreLogic’s, used public record data, which reveals only the initial amount of a mortgage when it’s taken out. CoreLogic then makes assumptions about how much principal has been paid down, and whether the homeowner has taken out any other loans or lines of credit. They then compare this amount to their own AVM, or estimated home values.
    It took a lot of time and work for us to revamp our methodology, but negative equity is an important problem, and we felt it deserved that amount of accuracy.
    I think it is important to pay attention to negative equity, not least because it’s keeping many homeowners from listing their homes. We’re hearing so many stories about lack of inventory in many markets (and indeed, I ran into this when I bought my own house this February), and negative equity is likely a reason for that in many areas. It ties homeowners to their homes, and they can’t sell without either putting up the cash themselves or negotiating a short sale with their bank. There are a lot of buyers out there, but without inventory for Realtors to sell, the market won’t recover as fast as it would otherwise.
    If you’re curious, you can see our full press release here: http://zillow.mediaroom.com/index.php?s=159&item=278

  2. Jim Duncan says:

    Katie –

    Thanks for taking the time to post such a great comment. From your own site, you say that the Zestimates in Charlottesville and Albemarle (my market) are inaccurate. A quick spot check of a few listings – current, under contract and sold – shows that you’re right in that the zestimates for Charlottesville and Albemarle are way off …

    How can you reach reasonably accurate conclusions based on inaccurate valuation assumptions?

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