COVER STORY
SVENJA GUDELL ZILLOW
THE APPRECIATION MYTH
I t’s hard for anyone, real estate investor or otherwise, to ignore appreciation in the housing mar- ket. Nor should you do so. Appre- ciation, which is the increase in a property’s value over time, can be a huge source of income stability during retirement and has made many a homeowner’s fortune if they bought and sold at the right times in a market cycle. However, relying on apprecia- tion alone for real estate invest- ment returns is not enough. A hot market with a high rate of appreciation can be truly strong if certain fundamental market factors are present, or it can be treacherous if those fundamentals are not present. “In general, you want to watch affordability, price to rent ratios, existing home prices vs. new construction costs, and how many people are defaulting on loans in an area,” observed Zillow chief economist Svenja Gudell. “As an investor, you need to think about your horizon as well,” she added. “If you have a really long horizon, you probably have less to worry about. If your horizon is the next two years, though, then you could end up with a lot more volatility in your investments.” characteristics, the appreciation rate in those properties will not always be as fast as the market’s median and average values might appear to indicate, although currently the bottom end of the market is appreciating faster than the top," she said (see sidebar above). “If you are a homeowner putting all your money in that type of investment without the information specific to your type of home, it could be a whole lot
as an investment (see sidebar on p. 25). “I don’t know that I would go so far as to call it a mistake, but it is definitely risky to get caught up in thinking of your home as an investment,” she said. “Of course, as a homeowner, your home has the nice feature of being kind of like a piggy bank. You pay your mortgage and you save money along the way. You probably gain some value, although I would say that it is probably the land value versus the structural value that you’re gaining in. Once you start to think of your home as an investment, though, your behavior changes a lot. I think you make decisions you might end up regretting, maybe trying to time the market, which homeowners, the decision to treat their home like an investment property is not one that is usually made in light of all the available information about their property. Investors, she said, are different. “Most investors have more experience in buying and selling homes. They often have more funds and better information about the market, which gives them a leg up. Not to mention, often investors can afford to buy a property with all cash." All of these distinctions between investors and conventional homeowners give investors a unique edge on the market that most homeowners lack. Real estate investors who already routinely rely heavily on data, information, trends, and news coverage to monitor markets and investments, may fare better in treating their own home as an investment property than the average owner-occupant. However, even investors have a blind spot, Gudell warned. “We have found that investors and traditional home buyers tend to assume that appreciation is a given in a market simply because the numbers indicate that it has been happening. This holds true in a lot of cases, but especially in lower-end homes without a lot of distinguishing often does not work out so well.” Gudell emphasized that for most
Svenja Gudell and two team members discuss emerging housing trends. Different perspectives play a vital role in creating a comprehensive economic analysis.
increasingly pronounced fashion since the housing crash. “That is a huge market, and it is going to remain so. I don’t foresee any really big changes there,” she said. “We’re already not able to supply enough homes for the entire population at this point.” When asked if she believes that the much-touted “American Dream” is dying or dead, however, Gudell responded with a resounding negative. “It’s alive and well. Ask Millennials, the biggest home-buying generation we have right now. They are more positive on homeownership than any other generation. They are just having a hard time getting there and they’re doing so differently because they are buying their first home much later on in life than other than other generations have,” she explained. “I’m just glad that I’m part of empowering them to be able to do it,” she concluded. “For anyone buying real estate, the more information you have, the more powerful your position will be.” •
riskier than investing in more traditional assets,” she said. “Of course, if you are a savvy investor who does your research and your due diligence, you can invest in just about any sector of the market and do quite well for yourself,” she added. WHAT’S COMING IN 2018 As far as the coming year goes, Gudell believes that U.S. housing is going to continue to be what she dubbed simply, “interesting.” “I don’t think that the market is going to change considerably in the next 12 months, unfortunately,” she explained. “I expect we’ll continue to deal with supply shortages, but it is going to get especially interesting for investors because we are living in a world where, at this point, it is very hard for a lot of people to buy a home. As a result, they are turning to single-family rentals to get a step closer to that American Dream of homeownership.” Gudell noted that an increasing share of the housing inventory is made up of single-family rental homes, something that has been happening in an
A mural in Zillow's headquarters places visual emphasis on the company's mission, shared by Gudell, to increase transparency in real estate and about the housing market.
real estate agents with online research [as many real estate analysts predicted would happen with increased web access], but they are doing a tremendous amount of online research before contacting an agent. Those who start their home searches online are actually more likely to published, Gudell became Zillow’s chief economist and carried on Humphries’ and Zillow’s goals revolving around “turning on the lights” to enable every use an agent than other buyers.” Shortly after that report was
participant in the housing market to make good decisions for their unique housing needs and situations. “If you’re going to buy a home and cross your fingers because you’re in a hot market and you waived all your inspections, even that decision should have beenmade after evaluating all the information and data you could get on how that might play out for you,” Gudell said. She added that this particular practice is not only risky for owner-occupant buyers, but that it leads to a dangerous behavior: viewing your own home
Carole VanSickle Ellis is the editor of Think Realty Magazine. She can be reached at cellis@thinkrealty.com.
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