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Four Popular Myths About Homebuying


Conventional wisdom, like conventional loans, can go on for decades without changes or challenges. Everyone assumes these nuggets of wisdom are true because they’ve been repeated so long and so often. But Zillow researchers used hard data to challenge some real estate assumptions and have discovered that what you think you know may not be true. Here are fresh takes on commonly held real estate beliefs, based on research for “Zillow Talk: Rewriting the Rules of Real Estate.”

Myth: Buy the worst house in the best neighborhood

This notion hangs around because it just seems to make sense. If you really want to make a smart investment, everyone knows location is the most important factor. So the worst house in the best neighborhood should be a great deal. You’re buying the best location you can afford, so what if you have to buy a sub-par house? But it turns out, that’s not such great advice. At best, the bottom 10 percent of houses in a ZIP code will appreciate at a similar rate to the other 90 percent of homes, leaving you no better but no worse off than your neighbors. But it turns out that in the most affluent neighborhoods, the worst house is actually likely to appreciate more slowly than the houses around it. In essence, not only is the myth not true, when it comes to the nicest neighborhoods, it’s the exact opposite of true. The worst house in the best neighborhood is the worst investment.

Why would that be? Most likely the demand for cheap homes isn’t very strong in affluent neighborhoods. People who want to live in fancy ZIP codes want fancy houses as well. Besides, a house that is substantially cheaper than those around it is less likely to attract bargain hunters than it is to raise concern about what’s wrong with it.

How about the worst house in the hottest neighborhood? If you can get into a neighborhood that has seen five consecutive years of higher-than-average home value appreciation, you can get one of the low-end houses, fix it up and turn a tidy profit. But timing is everything. If you miss the spike, you’ll be stuck in an underperforming house. If you buy a bottom-tier home in a neighborhood that was recently hot but now just luke-warm, you’re going to see lower than average appreciation.

According to the data, to see tBhe maximum return on your investment, you should buy in the most expensive neighborhood that you can afford to buy a home that isn’t in the bottom 10 percent. It doesn’t have to be the best house or even one right in the middle. But the worst is, well, the worst.

Myth: If you want a screaming deal, buy a foreclosure

At the height of the housing bust, you could see stories every day about the huge discounts available on foreclosed houses. Foreclosures could be had at less than half the price of other homes, so buying anything else seemed foolish. That talk has calmed but there’s still the pervasive ideas that foreclosures are always a bargain. But it’s not necessarily so.

Yes, foreclosures frequently sell for less than other homes. But they aren’t like other homes. When people are in financial crisis, unable to make their mortgage payments, chances are good that they aren’t keeping up with basic maintenance. Why fix the roof when you’re going to lose the house anyway? In addition to issues of neglect, some homeowners facing foreclosure actually vandalize the home and take out copper piping, appliances and anything else they might be able to sell. Add to that the fact that banks don’t have the same disclosure obligations as traditional homeowners.

Of course, the impact of foreclosures on price varies from market to market. In some regions, the discount for buying a foreclosure is still steep. In others, it has all but disappeared. But instead of assuming you’ll get a better deal on a foreclosed home, make sure you are comparing prices between homes of similar size and similar condition.

Myth: Real estate is a terrible investment

It’s true, when you look at annual returns over most long periods, stocks perform at almost twice the rate of residential real estate. But you can’t live in your stock portfolio. That’s worth something each and every month. In addition, buying a home probably means taking out a mortgage. Not only does that bring tax benefits, but it allows you to leverage your down payment to make a bigger investment. If you have $100,000 to invest in stocks, you can buy $100,000 worth of stock. But if you take that same $100,000 and invest it in a home at 20 percent down, you can buy $500,000 worth of real estate.

In “Zillow Talk,” Zillow Group CEO Spencer Rascoff and Chief Analytics Officer Stan Humphries crunched the numbers and determined that from 1975 to 2014 the S&P 500 averaged an annual return of 10.4 percent while residential real estate averaged 11.6 percent annual returns. Buying a home is a great investment.

Myth: Buying a home is a risk-free investment!

While it’s true that real estate is, historically, a less volatile investment than stocks, it’s still an investment and that means there is some risk. It’s a gamble that usually pays off but not always. And we’re not just talking about those horror stories you see in the news about a couple buying a home sitting atop an enormous snake den or discovering the carpeting covered giant holes in the floor.

Buying a home is a particularly risky gamble for low-income families. If you’ve had to stretch to buy an inexpensive home in an inexpensive neighborhood, you are probably in real trouble if you lose your job. You’re less likely to have a financial cushion. And if you lost your job as part of a regional economic downturn, chances are you can’t just sell your house because your potential buyers are likely out of work too. That means you can’t move to where you might get another job.

In addition to the loss of flexibility, lower income homeowners are less likely to benefit from the mortgage-interest tax deduction because they are less likely than more affluent taxpayers to file itemized tax returns.

Does that mean you have to be well-off to profit from owning your own home? Certainly not. But it does mean that you shouldn’t go into homeownership thinking that it’s going to give you an instant financial leg-up. Real estate is a good bet – if you can afford to make it.

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