Do American homeowners think their properties are worth less than the actual market value, as measured by professional appraisers?
Highly unlikely, you'd probably say. Everybody knows that owners tend to have optimistic impressions of what their homes are worth. They know how much money they've sunk into improving the place, and they know — or think they know — the prices for houses in the neighborhood.
But provocative new research from the country's second-largest mortgage lender suggests the opposite is true. According to new statistical analyses by Quicken Loans, owners on average underestimate the value of their homes 1.6% compared with appraisers' valuations.
Using databases of 50,000 to 60,000 new applications for mortgage refinancings per month, Quicken has created what it calls the Home Price Perception Index to measure the differences between owners' upfront estimates — routinely provided to loan officers as part of the application process — and the appraisals that are subsequently performed.
During November, owners seeking to refinance in roughly three-quarters of the major metropolitan areas covered by the index had lower estimates of their homes' worth than what turned out to be the appraised value, according to researchers. The dollar differences were not huge in most cases — from $2,000 to $4,000 on a $200,000 home. But in a few markets they were considerably larger.
For instance, owners in San Jose estimated their houses to be worth 6% less than the value subsequently determined by appraisers. With a median sale price of $860,000 for existing homes during the third quarter, a 6% perception gap translates into big bucks — $51,600.
In Los Angeles, applicants for refinancings underestimated values 3.8% on average ($482,000 estimate versus $499,641 appraisal); in Seattle, the gap was 2.8% ($360,000 versus $370,080); Miami, 2.3% ($270,000 versus $276,210); Boston, 2.2% ($400,000 versus $408,880). In the Washington, D.C., area, the gap was 1.8% ($389,000 versus $395,885).
Owners overestimated values in a handful of major markets. In Philadelphia, the gap was 1.6%, Charlotte, N.C., 1.3% and Chicago 0.3%. Quicken researchers found the widespread pattern of undervaluation is in distinct contrast with owners' estimates a few years ago, which often were far out of sync with appraisers' reports.
At the peak of the housing bubble in 2005 and 2006, appraisals often came in below owners' estimates, in part because prices were spiraling upward at double-digit rates in overheated markets.
In the recession years following the bust, the gap between what owners believed their homes to be worth and appraisers' valuations gradually narrowed, and by 2013, with the market rebounding solidly in many areas, it virtually disappeared.
More recently, the trend has shifted to slight underestimates by owners.
Why are owners a little behind on pricing? Quicken chief economist Bob Walters attributes it in part to the fact that owners are more likely than professional appraisers to lag behind market trends.
"Appraisers are looking at the market all the time," he said. Owners, especially those who are seeking to refinance but not sell, aren't as likely to stay on top of month-to-month changes.
Appraisers contacted for reactions generally were skeptical of the Quicken index findings. Kenneth J. Mullinix of Laguna Beach said that never in 20 years in the business "have I done an appraisal where the owner has said to me, 'Wow, the appraised value is higher than I thought.'"
Don Boucher, an appraiser active in Washington, D.C., and Maryland, says nothing much has changed. Realty agents and owners "are still bitching at us for low appraisals."
But one nationally known appraisal expert, Gary Crabtree of Bakersfield, thinks Quicken may be on to something.
"Today's homeowners have access to numerous [online] valuation tools and multiple listing service systems that they didn't have" until recently, he said in an email. As a result, they "tend to more closely track the market conditions in their neighborhood."
Does it matter much if you underestimate your home's worth by a percentage point or two? It definitely does if you plan to sell — you could end up leaving money on the table.
For a refinancing, your perceptions probably won't affect the deal. The mortgage lender is going to peg its maximum loan amount on the value reported by the appraiser, not your estimate, whether low or high.