Odds and ends from the L.A. Times

There is a trio of stories out on October 30 that says much about our psychology at this point in the real estate market.

First, homeowners with adjustable rate mortgages are nowhere near a panic point, if a survey conducted by Wells Fargo is accurate. Although some 80% of ARM homeowners are concerned about rising rates, about 20% believe they are prepared for rate adjustments and don't plan to change anything. And more than 50% believe they can refinance their loans.

Even more telling, 10% of all homeowners in this survey said they expect home values to increase "a lot", 53% said values would increase "a little", and 27% said values would stay "the same". Of the remaining 10%, they either weren't sure or were expecting a decline.

Why is this so telling? First, although the survey, if properly conducted, did so, the story does not break out "values will decline" into its own category - it just lumps it with "not sure." That suggests to me that the probability of housing value decline is still almost non-existent, in the mass public mind.

Second, I seriously wonder if there is any value in conducting this kind of survey when one considers what news the participants have recently been exposed to. In a recent L.A. Times story called "The Pain of Selling Your House", psychologist Barry Schwartz talks about how the power of suggestion can create anchors in our brains which we use to estimate the value of something. When values are presented to somebody in a way that they become anchored in the brain, they are then unconsciously used when formulating subsequent opinions about the value of something. As an example, for a few homeowners, a home's purchase price becomes an anchor. For other homeowners, a neighbor's recent sale price becomes an anchor. Getting back to this survey, if you are a homeowner, and you've been hearing news stories for much of the year about how median prices are still climbing, but the appreciation rate is really slowing down, is it any surprise that 53% of homeowners responded that home values would rise "a little?"

Now let's talk about St. Joseph. There have been stories this year about how desperate homesellers have resorted to burying statues of St. Joseph in their yards to help their homes sell. Religous goods suppliers report that sales of St. Joseph over Mary are running about 5 to 1. I won't elaborate much further, but I'll just say that in large scale boom times, we tend to think more along scientific lines, thinking we have the power and we are in control of things, and in macro bust times, when things spiral beyond our control, we like to turn to religion, our horoscope, Superman, or anything else that will help us struggle through.

And finally, we have complaints about Zillow.com. The story does not get into specifics, but a housing advocacy group complained to the FTC that values in Zillow are not accurate. The complaint states that Zillow's data is helping predatory lenders, real estate shysters and others "take advantage of unwitting consumers." So does the housing advocacy group think values are too high? Or too low? Or is the group complaing that Zillow swings wildly either way, being accurate only about 30% of the time? Shysters could take advantage of data if it were at either extreme, because there are a lot of vulnerable people out there. If prices are too high on Zillow and homeowners believe those prices, they may fall for the siren calls of hucksters who encourage them to borrow more against their house than it is worth. If prices are too low, and somebody is upside down on his mortgage, a huckster could panic somebody into "refinancing" into something more disastrous.

The market is in a state of flux, and anybody watching these markets carefully knows that values are shifting downward. Although Zillow does work to increase the accuracy of its estimates by crunching a lot of data, the estimates still lag what the market is doing now, which suggests Zillow's values are too high. However it wouldn't surprise me if your average homeowner looked up his property on Zillow and believed it to be too low.

I'm tacking this on late. There is a fourth story about how Capitol Hill will be looking to "tighten" homeownership writeoffs. Current law does not require local governments to report to the IRS what component of assessments collected are truly for property taxes, and what funds collected are for special-benefit assessments, which are not tax-deductible. And - you guessed it - many homeowners have been taking the whole writeoff, since it so often happens that the entire assessment is not broken out into what is tax deductible and what isn't. Other areas that are targeted for tightening is in the write-off of mortgage points, and in cash out refinancings. If cashouts were used for capital improvements, that would be considered legitimate and tax-deductible. If the cashout was used to buy a Hummer, a home entertainment system, or a vacation, these probably would not qualify. So the committee investigating these matters is proposing a red-flag system whereby the IRS would be alerted when loan values are increased by more than $100,000 in refinancings.