What is the typical rate of appreciation for home values? What does an appraisal do? What about an inspection? And is PMI always necessary?
Those and other questions were featured on a recent survey by Zillow, the popular MLS website, that gauged how knowledgable potential homebuyers were in the basic components of the process. All in all, the results were promising – 65 percent of respondents answered correctly more than half the time – but some answers seemed to indicate that homebuyers need to read up on the process.
For instance, more than 42 percent of respondents said that homes will appreciate at 7 percent annually in future years. According to research by Robert Shiller, one of the architects of the Case-Shiller indices, homes appreciate, at most, between 2 and 5 percent annually, and that’s in a normal housing market.
That statistic is garnering the most attention out of any in the study, and Stan Humphries, the chief economist at Zillow, expressed his concerns in a HousingWire piece on the survey.
“It’s troubling that we’re still in the midst of one of the worst housing recessions in history, and yet prospective buyers continue to have such high expectations for home value appreciation,” Humphries said.
Other questions yielded similarly questionable answers: 41 percent of respondents said that PMI is mandatory regardless of the down payment, when lenders generally require PMI only when down payments are below 20 percent; 56 percent said that appraisals determine a home’s condition, when inspections determine that (appraisals, as many Realtors are familiar, determine a home’s value); and almost 50 percent of respondents thought that prospective buyers own their homes as soon as contracts are signed, forgetting about the closing phase, filled with purchase and sales agreements, that can take some time.
Humphries reiterated, again in HousingWire, that buyers should always be cognizant of the home buying process, given its overwhelming importance on the their finances.
“It’s great that buyers seem to have a fairly solid grasp of the home-buying process, but since this is one of the biggest financial decisions of most people’s lives, it’s even more important that they understand how that investment will appreciate after they sign the papers,” Humphries said. “Over-estimation of the appreciation potential will lead many to buy real estate when the time in which they plan to live in the house may make renting a better strategy.”