The Endowment Effect in Real Estate

sebfreySanta Cruz Real Estate

The endowment effect is a human tendency to value something more when we own it. Last year, economist Richard Thaler even won the Nobel Prize for his work regarding this behavior. But how does the endowment effect in real estate manifest itself? First, let’s give a simple example of how the endowment effect works.  Let’s say a group of people is asked how much a coffee mug is worth. They may respond with something like “around $2.” However, if they’re asked how much each member’s own coffee mug is worth, they will almost invariably respond with a higher value, like perhaps $8.  It’s a striking phenomenon, and it’s observable in primates as well as humans.  Simply put, there’s a strong tendency for us to overvalue things we already own. It could be something simple like a coffee mug, but it also applies to our real estate. Homeowners often think their homes are worth more than they actually are.  For a long time, I’d figured this was primarily because of a strong emotional attachment to the property.  After all, it’s only natural: most homeowners have created lots of memories over many years in these homes, and so of course they value the property more highly than “the next guy.”  Sociologists, however, explain that this works on a much deeper level than simple emotional attachment: fear, or specifically, fear of loss (and no, fear is not an emotion). That fear of loss drives us to overvalue things we own, and according to the Endowment Effect, this is the … Read More

Why the “Shift” Happening in Our Market Isn’t What You Might Think


Shift happens.  But is our California real estate market shifting now too? There are all kinds of stories out there that seem to be saying that it is. Last week I was at a meeting with some big time Silicon Valley real estate brokers, and they agreed that the market has definitely changed. They said that multiple offers are history for now, properties aren’t selling for hundreds of thousands of dollars over asking price, and there’s no need to set an offer deadline anymore because you’re lucky if a seller gets so much as a single offer. This is radically different than the kind of talk we heard earlier in the year about our market, so I did some research of my own on this topic. From what I can tell, the market is pretty much just following its normal yearly pattern. In the summertime, the market usually hits a bit of a lull. In our area, we have two big markets—the spring market (which was a very strong seller’s market this year) and the fall market. We’re just now sliding into the fall market, and based on the numbers I’m seeing, we should still have a strong market for sellers. Inventory has built up over the year (as it does, every year).  You’ll note there are price reductions happening because people overpriced their properties earlier in the year and now they want to get them sold before winter, so you will see a lot price reductions.  It’s important to note, though, that these are asking prices. I haven’t yet … Read More

Five Worst Home Improvements for the Money

Seb FreyCommentary

Five Worst Home Improvement "Investments"

Now that more homeowners are looking to create housing wealth by way of the remodel, it bears mention that not all home improvements are created equal. True, some upgrades not only increase a home’s marketability and reduce selling time, but they return more that their cost in increased home value. These types of repairs are good in every way, and also are a great alternative for sellers who are stuck in their current living situation, and would prefer to make the best out of their circumstances by optimizing their home to fit their needs. Yet other “repairs” are more like upgrades. They are pricey, do little to increase a homeowner’s enjoyment, and to make matters worse, don’t provide any kind of return on the investment when it comes to selling. Check out this list below of the Five Worst Home Improvements for the Money: 1. Home office conversion – Average cost: $28,888 – Average percentage recouped at the time of sale: 45.8% Typically, buyers would prefer to just have a plain ‘ol bedroom. What’s more, marketing a home as having an office invokes thoughts of actually having to work, something a buyer may prefer not to consider while making their decision. 2. Sunroom addition – Average cost: $75,224 – Average percentage recouped at the time of sale: 48.6% Often times, sunrooms are “additions”, which change the footprint of the. This not only can be costly, but drastic changes such as these can deter many buyers. Given the cost, the potential value associated with a sunroom simply … Read More

Mortgages for More than just Spring Chickens

Seb FreyCommentary

Spring Chickens

As all of the housing forces come together, rather strange results surface from time to time. The newest is relatively unprecedented, with Americans of retirement-age taking out long-term mortgages. To read an interesting article about never being too old for a mortgage, CLICK HERE. It wasn’t so long ago that Americans would work to pay off their homes, sell them, and use the equity to downsize and buy a small home all-cash, with the remainder serving as the nest egg. Yet with equity levels taking such a hit over the last few years, homeowners have been forced to rethink the way they navigate their retirement. Interestingly, age is a protected category within the Equal Credit Opportunity Act, a federal credit law that bars credit discrimination based on race, color, relation, sex, etc. With that said, as of late mortgages have gone out to borrowers nearing up to 100 years old, and everybody in between. In order to qualify for a mortgage, borrowers must demonstrate they have income rolling in. This can include retirement income, social security, etc. While previously such income would never help borrowers to qualify for anything, today’s low values and low rates are allowing retirement-age borrowers to get in the game. There are some unique issues that seniors must take into consideration. For starters, loan approval is based on current income levels, which in the case of retirement income could change after the death of a spouse. If this happens, the loan stays but the payment may prove to no longer be manageable. … Read More

The Incredible Shrinking Housing Market

Seb FreySilicon Valley Real Estate

The Incredible Shrinking Housing Market

Some new housing data was released, revealing the incredible shrinking housing market. For starters, 31% of all homes sold in Q2 of this year were either short sales or bank-owned foreclosure sales, which together are collectively known as “distressed sales”. The percentage of overall market activity that was distress-driven actually went up from 26% year-over-year, even thought the total number of distressed properties sold went down. More about that in a moment. One finding that deserves a good long look is the discount at which distressed properties are purchased. According to these findings, REO sales and short sales, on average were purchased for 32% less than comparable non-distressed properties. 32% is no chump change, by any means. The fact that he number of distress sales has dropped off yet they have gained market share can only mean one thing; that fair-market sales have dropped off further. This is indeed the case, as non-distressed homeowners are refusing to list their homes. This is due on part to the hit that their equity has taken over the last few years, but that is merely one part of the story. Fair-market listings are being undercut on price at every turn, meaning that even if they are listed, in many cases they are less attractive to buyers and don’t make it to the closing table. This is important to note because fair-market sellers have a special role to play in any healthy housing market. In many cases, fair-market sellers sell their home, and buy another, more expensive home. The mid-high … Read More

Wise Words to Aid Home Buyers

Seb FreySilicon Valley Real Estate

Happy Buyers

Sometimes the reporting on the world of real estate gets so caught up in the rapidly changing landscape that the elements of buying and selling real estate that are most important for the public are not given the attention they deserve. Yesterday a great article in the San Jose Mercury News came out where a series of industry professionals gave wise words to aid home buyers. Since the article is basically a series of quotes, it seems most fitting to just go ahead and list our some of the best ones, one-by-one. While they are pretty self-explanatory, they are very easy to lose sight of once buyers get into the process. Jim Walton, vice president of consumer credit with MetLife Bank in Irving, Texas “There is more to home- ownership than a housing payment. Homeownership requires a commitment to a property and to a community.” “A lender can tell you the maximum mortgage you qualify for, but financial experts recommend that you determine your own upper limit for a housing payment.” “Buyers should take a disciplined approach to saving for a down payment, and then they need to be able to continue to save after they buy, for home maintenance and emergencies.” “A rent-versus-own calculator can be a good resource, but generally these will show you the maximum mortgage you qualify for at the best rates.” “Buyers need to factor in maintenance costs which can run from 1 (percent) to 4 percent of the home value per year.” Marc Schindler, a certified financial planner in Bellaire, … Read More

Silicon Valley Bucking the Trend

Seb FreySilicon Valley Real Estate

As the gloomy reports continue for the housing industry, there is one market where both high-end employment and housing are on an uptick. Thanks in no small part to a techno-renaissance, the Silicon Valley is presently enjoying one of the strongest housing markets in the nation. To check out a recent article from the NAR about Silicon Valley housing, CLICK HERE. With growing companies such as Facebook and LinkedIn employing more and more people, there is a growing demand for luxury homes in the nearby areas, with values climbing as a result. In Palo Alto, for example, the median price of single-family homes increased 20% over a year ago to $1.63M. While in Mountain View, the median price climbed 3.1% from April to May up to $957,500. Also interesting to note is that San Jose has one of the shortest average marketing times in the nation, in spite of having one of the highest median values of any major metropolitan area. A couple of things are interesting about all of this. First off, this market performance relies almost entirely on the local employment market. The Silicon Valley is just as subject to distressed properties and shadow inventory as any other area, yet at present these factors are trumped by area buyers with money burning a hole in their pocket. So given that this market behavior is in stark contrast to a variety of unhealthy market conditions, can it last? False recovery or sustained recovery? It all depends on who you ask. Some claim that local tech … Read More

Future Value Behavior is Anyone’s Guess

Seb FreyCommentary

Uncertainty Abounds

One of CNBC’s real estate reporters recently wrote an article discussing some recent conferences she attended along with other finance experts, where the future of housing and the economy was discussed at length. The verdict: nobody is still willing to stick their necks out and claim they know what is going to happen next. As best illustrated, statisticians deal with events that repeat themselves. The housing market boom and bust of the last several years is so unprecedented that the experts are not able to rely on past experience to anticipate future behavior. Home values are also difficult to predict because they are affected by so many interlinked factors. Even though it all starts with supply and demand, those elements are subject to fluctuations based on a myriad of things. Some people say jobs are what the housing market needs, but that’s only one small piece of the puzzle. Jobs won’t keep the millions of homes in the foreclosure pipeline from entering the market and over saturating supply.  Yet as values fall, the potential buyer pool grows, which can ramp up demand. In the end, analysts are finally throwing their hands up and claiming that what the future holds is anybody’s guess. So what does this mean for buyers and sellers? First off, it is important to understand that each buyer and seller is a participant in the current market, and should base their decision making on such. What happened five years ago is irrelevant, and what will happen five years from now is impossible to … Read More

New Year, Old Challenges for Santa Cruz Real Estate

Seb FreySanta Cruz Real Estate

What she doesn’t say is that there is a lean supply of homes because so many people are waiting for the market to turn around before they sell – and many many other people who would like to sell cannot, because they are effectively trapped in their homes which are “underwater” (that is, they owe more on the homes than they are worth). … It means that in the face of weak employment and stagnant incomes, when interest rates rise (as they are apparently rising now), the prices people will be able to pay for housing are going to drop – and that’s going to bring house prices right on down too. … Suffice it to say that while it may be true as the President says that there is a clear trend of lower unemployment – that trend could be easily reversed and, as the article I linked to notes, the drop in unemployment is largely due to the fact that 206,000 more people have given up looking for work and are no longer counted as unemployed. tealeaves.jpg I’ve sipped the last of my Earl Grey and I’m looking down at what’s left in my cup, and I’m trying to make sense of what I see there. … Our pre-tax payment will be considerably higher than that, of course – so I for one really hope they don’t pull the plug on the mortgage interest tax deduction – which could , of course, have a really deleterious effect on home prices depending on how it is implemented.

Zillow Giveth, Zillow Taketh Away

Seb FreySilicon Valley Real Estate

Zillow Logo

While searching for a blog topic, two reports spanning the good/bad news spectrum caught my eye, because had a hand in both. To check out a Zillow-backed report showing the relative strength of the South Bay housing market, CLICK HERE. To check out a different Zillow-cited report showing how home values and negative equity are still headed in the wrong direction, CLICK HERE. Zillow is good for a few things, and not particularly good for others. They track housing statistics, and have some very detailed market reports that can be fairly telling. Their site also has all of the latest mortgage rates, and other helpful tools for buyers and sellers. Housing statistics simply report what has already happened, and there isn’t much room to screw that up. Yet where Zillow use can get dangerous is when people treat it like the Kelly Blue Book of housing, and believe what they find out. Users can plug their home’s address into Zillow and get a “Zestimate” of value. Apparently, this value is derived from some sort of algorithm involving tax record specifications of a home, and reported sales activity in the area. Sometimes, conditions are in place for Zillow to provide near-exact values. For homes that are located in complexes or communities of similar homes, sales data for the immediate area may be a strong indicator, especially if the area has high levels of sales activity. Yet for most other homes, things aren’t so simple. Often times, tax records don’t accurately report what’s on the ground, which … Read More