Homeowners in Denial about Home Values

Here's a reality check: your home is probably worth less than you think. A quarterly survey reveals that many homeowners are overly optimistic about the value of their property.

Calvin & Hobbes cartoonist Bill Watterson once said, "It's not denial. I'm just selective about the reality I accept." Homeowners today can relate. As housing prices continue to waver, many of them just don't want to accept the true value of their largest asset.

Say it ain't so

Zillow.com's quarterly Homeowner Confidence Survey indicates that many homeowners aren't facing the facts with respect to home values. The survey, conducted by Harris Interactive on October 7 and 9, shows that only 51 percent of homeowners nationwide believe their home's value has declined over the past year. In actuality, 74 percent of U.S. homes have dropped in worth.

The survey also reveals that the severity of homeowner denial varies by geographic region. Residents in the South and West were slightly more realistic than their counterparts in the Northeast and Midwest. Specifically, 47 percent of respondents in the South believed that their home had declined in value, relative to an actual decline in the value of 67 percent of homes. In the West, these figures were 65 percent and 85 percent, respectively. In the Midwest, 51 percent of homeowners acknowledged a home value decline versus the actual number of 72 percent. The Northeast homeowners were the most delusional; only 45 percent admitted to a decline, while 72 percent of homes were worth less.

Keeping it real heads off surprises

Homeowner denial about property values can create problems when those homeowners want to sell, refinance, or cash-out their equity. A property that's priced too high won't attract the right buyers and, thus, won't sell. The homeowner may come to his senses eventually, with the help of some pleading from his agent, but only after valuable time has been lost.

An overestimation of a property's value will also derail equity financing. Homeowners often fund life's largest expenses with some type of mortgage, but this is only possible when the equity value will allow it. Parents intending to fund college tuition with a second mortgage, for example, may find themselves scrambling when the appraisal doesn't support the amount of financing they need.

Foreclosures suppressing recovery of housing prices

The largest factor with respect to home values right now is the sheer number of foreclosures on the market. In September, the Center for Responsible Lending (CRL) predicted that 40.6 million homes will suffer value declines that are specifically related to the presence of  subprime foreclosures selling in the same neighborhood. CRL also estimated that the average value decline would be more than $8,600 per home, for cumulative value losses of $352 billion.

Those practicing selective reality will filter out these predictions, while ignoring the foreclosure sale signs in their own neighborhoods. It's just one way to cope with a crisis that's already lingered on for too long.