Years Into Downturn, Homeowners Accept Declining Value

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House that is declining in value Homeowners are often a sunny (we won't say "irrational") lot that tend to believe their homes are more valuable than they really are. Year after year, in survey after survey, they make it clear that they regard a two-room shack as a Swiss chalet, their mini-McMansion a bottomless piggy bank, and their remodeling spend as an all-upside investment. And, despite evidence to the contrary, many have believed that somehow, some way, their particular address is immune to falling home values in their zip codes.

Looks like homeowners are getting a dose of reality. According to a new Zillow survey, they are finally admitting what the market's told them for a few years: Home values don't always rise steadily, and may even decline.

Indeed, like a stock or mutual fund, a home's past performance (say, through 2007) doesn't always indicate future results. Homeowners, it seems, have gone bearish. More now expect their homes' values to fall.

It's a staggering shift in sentiment -- albeit a little bit of a delayed reaction to the punishing events of the two year-old housing crisis. American homeowners' confidence in their homes' value fell to the lowest level in nearly two years, according to Zillow. In fact, just 20 percent believed that their homes' value rose during 2009, when in reality, 28 percent of homes rose in value.

That sent Zillow's Home Value Misperception Index into negative territory for the first time, to -2, suggesting that homeowners are now overly cynical about the value of their homes.

As for the rest, 50 percent of homeowners surveyed believed their home values fell (reality: 65% of values fell), and 30% believed their home values remained flat (reality: 7% were flat). The online survey of 2,215 adults was conducted in January by Harris Interactive.

"Homeowners are finally succumbing to the notion that, in most areas, declining home values over the past year are no longer the exception, they are the rule," Dr. Stan Humphries, Zillow chief economist, said in announcing the survey results.

Some homeowners continue to delude themselves, of course. Last year, according to Zillow, nearly half of homeowners felt that local home values would drop, yet 30 percent took a "not my home" attitude -- believing that somehow felt their home would withstand the slowdown.

Zillow spokeswoman Amy Bohutinsky tells HousingWatch that homeowners have absolutely lagged the market in terms of accepting the housing-related recession. The gap between reality (dismal) and homeowners' perception (optimistic) of values was most unequal two years ago, she says, but now it's reaching a more realistic stance.

"It's almost as if homeowners have traveled through the five stages of grief, starting at denial, and finally reaching acceptance," says Bohutinsky. "They're now accepting that there's been a housing recession."

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