This article comes from First Tuesday Journal Online
42% of prospective homebuyers believe home values will increase 7% annually in the coming years, according to a poll by Zillow. These answers reflect the inadequate knowledge most prospective homebuyers have about the most important financial decision of their lives.
In a normal market, home prices appreciate between 2% to 3% per year (the historical pace of consumer inflation), according to the Case-Shiller home price index. Since the Lesser Depression continues its stranglehold on the housing market, however, home price increases will be even less than consumer inflation for years. [For more information regarding home pricing, see the first tuesday Market Chart, California tiered home pricing and the October 2011 first tuesday article, The equilibrium trendline: the mean-price anchor.]
The poll asked additional questions related to the process of purchasing a home, and the responses reflected an obvious gap between a homebuyer’s knowledge and informed actions.
41% of the homebuyers polled believe private mortgage insurance (PMI) is required on all home purchases regardless of the down payment. However, PMI is only required when less than 20% down is provided.
Additionally, 56% said an appraisal determines whether a home is in good condition, which is the exclusive purpose of a home inspection report.
first tuesday take: Multiple listing service (MLS) brokers and their agents have much work to do to get it right when putting a property under contract. Homebuyers are allowed to be too distracted by the prospect of their white picket fence and three-car garage to pay much attention to the “minor” details of the actual purchase.
Decades of public policy pushed by the government (primarily by the tax code, government-guaranteed mortgages and ever lower interest rates – most of which have or will likely end) have lulled Americans into a false optimism about the pricing and housing information that will take years of economic depression – and a generation of buyers – to undo. [For more information regarding public policy and homeownership, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity? and the September 2010 first tuesday article, The era of the financially illiterate homebuyer.]
When it comes to locating and negotiating the price of a home, shopping for mortgages or maintaining a property, most homebuyers don’t have a clue where to begin.
Enter the gatekeepers of real estate — brokers and their agents — who are charged with the task of educating their principals and shedding light on the realities of the current housing market. Along with their fiduciary duty to demand up-front disclosures from sellers and seller’s agents, buyer’s agents are also duty-bound to their buyers to ensure they are completely aware of the consequences flowing from the financial decisions they make. [For more information regarding disclosures, see the November 2010 first tuesday article, Holmes v. Summer: dilatory disclosures and the damage done; for additional commentary regarding legal and tax advice, see the September 2011 first tuesday article, Raising the bar of real estate advice.]
As times of economic anguish do induce great change, responsible brokers and their agents now have a prime opportunity to serve and educate their buyers and sellers who — now more than ever — are willing to learn.