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Zillow execs follow housing data to surprising conclusions

SEATTLE – In less than a decade, Seattle-based Zillow has become the nation’s leading brand for homebuyer real-estate information. It’s become synonymous with looking up your home’s value – or someone else’s.

In a forthcoming book, “Zillow Talk: The New Rules of Real Estate,” Zillow CEO Spencer Rascoff and chief economist Stan Humphries offer some surprising answers – backed by data – to a range of housing questions. Among them:

• Should Congress eliminate the current mortgage-interest tax deduction? (Yes)

• Should the government subsidize homeownership for low-income families? (No)

• To boost your home’s value, is it better to remodel your bathroom or your kitchen? (Bathroom)

Along the way, Rascoff and Humphries share tips and personal stories, such as why they financed their homes with adjustable-rate mortgages instead of conventional fixed-rate ones.

“The goal of the book is to replace folklore with fact and debunk myths,” Rascoff said.

“Buying a home is a gamble,” the authors write.

Don’t get them wrong. By their analysis, from 1975 to 2014, the S&P 500 returned an average 10.4 percent annually, while residential real estate returned 11.6 percent. Homes beat stocks, they write, because they come with less volatility, and thus, less investment risk.

But that doesn’t mean everyone, everywhere should be a homebuyer. “Encouraging low-income families to invest in underperforming communities doesn’t free these families from the cycle of poverty – it further traps them in it,” they say.

To bolster their argument, they offer a study of home values over more than 15 years in Los Angeles and Chicago. The areas where values went up the most were affluent, while areas where values fell the most were generally poorer.

Across the nation, values in rich neighborhoods appreciate faster, averaging 60 percent higher returns than poorer ones.

“In essence, buyers in poorer neighborhoods are making investments with both lower rates of return and higher volatility – a dangerous combination that we see virtually nowhere else in the economy,” they write.

In a chapter called “The Third Rail of Real Estate,” the pair suggest the government could eliminate the mortgage-interest deduction – which costs the government $100 billion in tax revenue annually – and replace it with, perhaps, a refundable tax credit or cash grant that helps first-time homebuyers with their down payment.

Zillow’s surveys have found that almost two-thirds of real-estate professionals believe the deduction is vital to the housing market’s health, while 70 percent of economists believe it should be eliminated or scaled back.

Canada, for one, doesn’t have this subsidy, but its homeownership rate is nearly 70 percent.

Only about 1 in 6 Americans is even eligible for the deduction: That’s because to take advantage of it, one must pay federal income taxes and itemize deductions. Subtract those who rent or own their homes free and clear, and the pool shrinks to about 13 percent of Americans who take the deduction annually.

The bulk of the book offers prospective buyers, sellers and their real-estate agents ideas on how to make better decisions backed by, you guessed it, Zillow’s information.

For example, they explain how the law of diminishing returns applies to home remodels: A $3,000 bathroom remodel – replacing the toilet and light fixtures, adding a double sink and installing some wallpaper – would produce a $1.71 increase in home value for every $1 spent on the project, they write.

By contrast, any type of kitchen remodel boosts a home’s value by only 50 cents for every dollar spent.

Kitchen renovations provided the lowest return on investment among the home improvements that Zillow studied.