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Factors That Impact Home Prices
When people buy and sell homes, how do they know what their home is really worth? Home pricing is a combination of art and science, and factors in variables such as location, weather, neighborhood demographics, crime statistics, quality of local schools, employment opportunities, access to entertainment and recreation, access to services such as healthcare, what comparable homes recently sold for, mortgage interest rates, etc. But there is no exact formula that we can all agree on, so we mostly let the market set the price of a home based on supply and demand. When demand is low, home prices tend to drop, and vice versa.
Despite better information flows in a more connected world, home pricing is still an inexact science.
And with the advent of the Internet, I am sure quite a few of my listeners are familiar with websites like Zillow.com, RedFin.com and sites run by banks such as Chase and Bank of America, that tell you what your home is worth – either as a single number or as a range. But, if you try this exercise on your own property, you’ll find that estimates and price ranges can vary by more than a hundred-thousand dollars – so despite better information flows in a more connected world, home pricing is still an inexact science. And while this was not news to me, a recent article in the Los Angeles Times further confirmed what I had known all along.
Popular Websites for Home Price Estimates
By the way, for those of my listeners who aren’t familiar with the websites I just mentioned – here are a few pointers. Zillow.com is the most popular online real estate information site – it provides active listings of properties for sale and information on houses that are not on the market. So, for example, you can enter your address or zip code on Zillow.com – I’ve put the link on my website OnTheMoneyRadio.org – and pull up information on the home such as square footage, lot size, number of bedrooms and baths, photos, taxes, location maps, neighborhood home prices, etc., and get what they call a Zestimate (pronounced ZEST-ti-met) of what your home is worth.
Home shoppers, buyers and sellers routinely use Zestimates as a baseline for home values. So if a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of, say, $425,000. Or a seller may question his real estate agent on why the home should be listed at below its Zestimate… things like that. To make matters worse, another site, such as Chase Bank’s Home Value Estimator may give you a different price. So this disparity in prices drives everyone nuts! As one realty agent put it, these varying price estimates are “the bane of his existence” because buyers and sellers each lock into different estimate – so a buyer might lock into a lower Zestimate, for example, and a seller may lock into a higher Chase Bank estimate… and this causes grief all around, often to the point of killing or delaying home sales.
Estimates Can Vary Widely
As the LA Times articles states, when the CEO of Zillow was asked if Zestimates are accurate, he said they’re “a good starting point” but have a “median error rate” of about 8%. To put that in perspective, 8% on a $500,000 home is $40,000 give or take – so we’re talking big numbers here and it’s the agent’s job to get buyers and sellers to converge on something they can both live with. And here’s where supply/demand kick in… if it’s a slow market, buyers typically have more leverage; but if it’s a hot market with several competing bids, in places like San Francisco, the highest bidder gets the prize!
Moreover, as Zillow says on its website – in small type – Zestimates can vary significantly from market to market, and 95% of the time, Zestimates are wrong, sometimes with disparities as large as almost $200,000.
For example, in Manhattan, the median home valuation error rate is near 20%. In San Francisco, it’s near 12%. So with a median home value of slightly over $1,000,000 in San Francisco, Zestimates have a price disparity of $120,000… or more for higher priced homes.
Several real estate agents did their own research – and you can too, by looking up the price of your home on the three sites I’ve listed on my website. What these agents found was pretty shocking… in one case, of 21 homes sold in a month in one community, online websites overestimated price on 17 sales, with two houses sold for 61% below the Zestimate. In another similar analysis, online estimates came in below the selling price 70% of the time, with disparities ranging as high as $70,000.
How to Navigate the Gap
So how do you figure out what a home is worth? Here’s my advice… visit a few websites to get a range of estimates… and, irrespective of whether you’re a buyer or a seller, don’t lock yourself into a number but get your mind set on a broad range… then use this range as a starting point for negotiations… look at the property objectively, look at its condition and whether it will need improvements or is already in great shape… see how well the house would meet your needs for atleast the next six to eight years… check out the neighborhood and location, by day and night… do your research on school scores, demographics and crime statistics… and negotiate with the buyer or seller in good faith… but remember, all along, you’re probably going to use a 15 or 30-year mortgage – so don’t let an extra twenty or thirty thousand come in the way of closing the deal… because, over the long run, that difference isn’t really going to increase your monthly mortgage payment by too much.
Also remember that housing markets move in cycles… prices go up, sometimes to bubble valuations as we just saw in 2005-2006, then come crashing down… so be careful not to buy at the peak or in a bidding frenzy… or to sell during a housing bust if you’re a seller… and know that if you buy at a reasonable price where you get good value for your money, there’s a good chance that your home value will rise steadily over time… so even if you pay a little extra, you’ll more than make up for it over the next six to eight years and beyond.
