Buyers have unrealistic expectations about home value appreciation
Despite widespread volatility within the real estate market and five consecutive years of home value declines, more than 42% of prospective home buyers believe property values typically appreciate by 7% a year, according to a new survey.
According to leading real estate information marketplace Zillow, which carried out the survey, this is an unrealistic expectation as, historically, home values in a normal market tend to appreciate by 2 to 5% a year.
Despite the unrealistic expectations about home value appreciation, prospective buyers seem fairly knowledgeable about the home buying process, answering questions correctly more than half the time.
However, several important parts of the process confused them. Some 41% of buyers think they are required to buy private mortgage insurance (PMI) regardless of the amount of their down payment. In fact, lenders typically require PMI only when buyers are putting down less than 20% of the home’s purchase price.
Additionally, more than half of prospective home buyers who were polled confuse appraisals and inspections. Some 56% said the purpose of an appraisal was to determine if the home is in good condition, when in fact that is the purpose of an inspection.
‘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,’ said Stan Humphries, chief economist at Zillow.
‘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,’ he explained.
‘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,’ he added.
The survey also found that 37% of prospective home buyer respondents believe buying homeowner’s insurance is optional. In reality, lenders require that borrowers purchase homeowner’s insurance. This insurance protects the lender. If catastrophe strikes, the mortgage will be repaid from the insurance proceeds.
Nearly half of polled prospective home buyers in the study do not understand when they will actually own the home they intend to buy with 47% having said a prospective buyer owns a home after the purchase contract is signed. The purchase and sales agreement merely kicks off the closing phase, which can be a lengthy process.
The majority, 87%, know that closing costs are negotiable and can vary by bank and lender. Lender fees, like loan origination fees, administrative costs and other clerical fees, are typically the most negotiable in the home buying process.