This is an unrealistic expectation as, historically, home values in a normal market tend to appreciate by 2-5 percent a year. (1)
Zillow, with Ipsos®, surveyed prospective home buyers (2), asking basic questions about the home buying process.
Despite the unrealistic expectations about home value appreciation, prospective home buyer respondents seem fairly knowledgeable about the home buying process, answering questions correctly more than half the time (65 percent). However, several important parts of the process confused them. Two in five (41 percent) 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 percent of the home’s purchase price.
Additionally, more than half of prospective home buyers who were polled confuse appraisals and inspections. Fifty-six percent 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 Dr. 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. 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.”
Additional Survey Findings
- More than one-third (37 percent) 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. Forty-seven percent 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 percent) of polled prospective home buyers 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.
An online version of the Zillow survey, the “Buyer IQ Quiz,” is available at http://www.zillow.com/mortgage-rates/buyer-iq-quiz/and contains the correct answers. Following the quiz, participants are given a score and resources to learn more about the home-buying process.
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(1)Over the period from 1890 to 2006, the average annual growth in home values was 3.7%. Source: Irrational Exuberance byRobert Shiller (Princeton University Press 2000, Broadway Books 2001, 2nd edition, 2005)
(2) These are some of the findings of an Ipsos poll conducted August 31-September 1, 2011. For the survey, a national sample of 1,012 adults aged 18 and over residing in the U.S. was interviewed via Ipsos’ U.S. online omnibus. Among them, 177 reported that they plan to buy a home within the next 3 years, which qualifies them as “prospective home buyers.” A survey with an unweighted probability sample of 1,012 and a 100% response rate would have an estimated margin of error of +/-3.1 percentage points 19 times out of 20, of what the results would have been had the entire population of adults in the U.S. been polled. The margin of error for a subgrouping of the survey population of 177 individuals would be +/-7.4. These data were weighted to ensure the sample’s regional and age/gender composition reflects that of the actual U.S. population according to data from the U.S. Census Bureau and to provide results intended to approximate the sample universe. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
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