Homes are the most important (and largest) financial asset in the U.S., but it can be extremely difficult to judge the true value of a home. This is due, in part, to the uniqueness of a home- each is different, and even if you knew how much your neighbor’s home was worth, it might not be helpful in determining the value of your own. Additionally, the current value of a home depends on our guess about its potential resale value, which is generally not a factor in other products.
Here are a few statistics and tools you can use to estimate the value of your home:
Recent Home Prices
When real estate agents list a home for sale, they usually start by looking at comparable homes in the same area. Assuming there are comparable homes in the area (and it’s never a guarantee that there will be), and that said homes sell often enough to determine their relative value, evaluating comparables is a great way to determine the value of a home.
Unfortunately, it’s rare for there to be comparable homes in the same area as the house you’re trying to determine a price for, and even if there are, prices are usually fluctuating to the extent that it’ll be tough to nail down a standard value. It takes a long time for home prices to adjust to new economic conditions, and that disconnect provides opportunities for investors who focus on future values (which, to be fair, isn’t all that helpful for those trying to set a price on their home!).
Average Prices
Theoretically speaking, if you know how much a home last sold for and how prices have changed since then, you can estimate how much it would sell for in the present day. The one downside to this method of evaluation is that the mix of actual home sales never stays the same- expensive homes might be popular one year, while inexpensive homes might be ‘in’ the next, so the difference in average price might have little to do with real changes in value.
Economic Growth
Trends in product pricing can be shown by recent sales, which supposedly give us a clue as to how future values will shape out. Aside from the occasional bubble, however, home prices in an area generally depend on the supply and demand for housing, which is linked to economic growth. To be clear, no pricing method is going to be perfect- job trends won’t always translate into growth in the future, and the momentum of job growth can be less impactful in smaller markets. It’s also worth noting that corrections to job data are only make once a year, which can lead to a false view of the actual growth being procured.
Home Construction
Most localities require builders to get a new permit for home construction, so the government can report monthly permit totals for local areas. These monthly totals can provide would-be sellers with a better idea of the expected new supply, which generally changes the prices of homes in an area. It’s worth noting, however, that if the local economy enters into a downswing, a large portion of the units might not be built.
Repeat Sales Price Index
By looking at the actual sales price for the same home as it’s sold and resold over the years, you’ll be able to calculate an index of how much values have changed. Homes don’t resell every year, however, so looking at stats by the Federal Housing Finance Agency (fhfa.gov) will provide a clearer picture.
Source: Forbes