Zillow seeks to drive home buying with data

Pittsburghs historic Manchester community is spotlighted by Zillows top executives in their new book as a prime example of a hot neighborhood where it was possible for someone to buy a home in the bottom 10 percent in that community in 2008 and still outperform the neighborhood as a whole in terms of price appreciation.

These arent the worst houses in the best neighborhoods. Theyre the worst houses in the hottest neighborhoods. In a hot neighborhood, even the bottom 10 percent of homes can turn a cool profit, Zillow CEO Spencer Rascoff and chief economist Stan Humphries wrote in Zillow Talk: The New Rules of Real Estate.

Manchester is so hot that the bottom 10 percent of homes are not only keeping pace with the rest of the neighborhood, the authors wrote, theyre outperforming the more expensive homes by an average of 4 percentage points.

Broadly speaking, the authors also suggest that buyers are more likely to come out ahead by purchasing real estate on the outer fringes of a hot neighborhood rather than buying directly in the middle.

For example, instead of buying a home in Lawrenceville, one of the citys most sought after places to live, they say, the data indicates home buyers should look to neighborhoods just outside, like Garfield or Friendship, where prices are lower and homes stand a better chance of appreciating.

But there are exceptions.

There are circumstances where a neighborhood next to a hot one wont grow because of an important demarcation between the two, Mr. Humphries said. Railroads, highways or rivers could make it hard for neighborhoods next to each other to be identified with each other.

The Seattle-based real estate website that brought the word Zestimate into mainstream vocabulary has also discovered that investors can hardly go wrong buying real estate anywhere near a Starbucks coffee shop.

Looking at home value appreciation in areas located within a quarter mile of a Starbucks, they found that 17 years ago, a home now near a Starbucks would have sold, on average, for $137,000. A home that is not near a Starbucks would have sold, on average, for $102,000.

Fast-forward to 2014: the average home has appreciated 65 percent to $168,000. But the Starbucks-adjacent property has appreciated 96 percent to $269,000.

A lot of it has to do with being tied to how walkable a community is, Mr. Humphries said. Increasingly people value areas that are walkable. Home values rise more quickly there. The presence of a Starbucks is a likely indicator that an area is walkable. Starbucks is both a cause and an effect.

Starbucks is good at picking neighborhoods on the move, he said. And when a Starbucks shows up, it is a good sign of progress a neighborhood has already made.

Beyond that, its a cause, because home values appreciate even more than you expect once a Starbucks locates there. Why that happens is Starbucks serves as a stamp of approval for that neighborhood, which draws in more commercial development.

Real estate is likely the most important economic asset in which most families and individuals will invest. From the authors standpoint, too many people make poor decisions by allowing emotions to be their guide instead of following a trail lit by cold, hard data.

One area where homeowners are most commonly influenced by emotions is home renovations.

While many homeowners wont hesitate to sink tons of money into a new kitchen, the data shows kitchen renovations, at any level, offer among the lowest return on investment of all home improvements.

Every dollar you spend on a new kitchen only increases the value of the home by 50 cents regardless of how much the kitchen renovation costs.

A basement renovation, on the other hand, returns even less only 48 cents on the dollar, the lowest return on investment of any home improvement.

According to Zillows data, homeowners get the biggest bang for their buck with a mid-range bathroom remodel, which returns $1.71 in home value for every dollar spent.

Peoples prior beliefs were not based on data, but instead based on surveys of what people thought, Mr. Humphries said. Bathroom upgrades have a higher return on investment than kitchens. The amount you put into kitchens is greater, but the return on a bathroom is higher. It appears people value functionality over fashion.

Real estate is an area that is very emotional to most people and thus far has not always been guided by data-driven insight, he said.

Its a combination of excitement and fear that leads people to ignore data when it comes to real estate. Real estate is something we fall in love with and we do because it is associated with our vision of who we are and want to be.

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