Is your home price perception realistic?
Are you familiar with what home price perception is? It is the value you perceive your home to be compared to its actual value as determined by a professional appraiser. Quicken Loans, which is the nation’s second largest retail mortgage lender, keeps up with the home price perception index by comparing what homeowners estimate their home to be worth to what a professional appraiser actually arrives at.
A homeowner’s perception, or misperception, of their home’s value is important. When they are aware of their home’s actual value it reduces misunderstandings between them and real estate professionals who seek to help them. Two situations come to mind. The first is with real estate agents whom they hire to help them sell. If the homeowner has unrealistic expectations of their home’s value then they may pressure the agent into listing the home for a price that will keep it from selling.
In the situation of an appraiser, the homeowner may disagree to such an extent that they turn the appraiser in to the state licensing board for incompetency. In order to avoid situations like these, and help owners have a more realistic home price perception, I would like to discuss some areas that I have seen where there is confusion with regards to how it affects the value of a home.
Factors that affect home value
In my 25 year appraisal career I have found numerous areas that are misunderstood by homeowners regarding their home’s value, and
thereby affecting their home price perception. These include the following:
- The misunderstanding that cost equals value,
- Their home price perception is based on incorrect information regarding the size of their home,
- Inaccurate information regarding recent home sales, and
- Lack of knowledge regarding local market conditions as well as supply and demand.
Homeowners are not expected to have the training or education of a real estate appraiser however being aware of the above principles can help them understand the process appraisers go through when arriving at an opinion of value. I’ve heard people explain that an appraisal is only one person’s opinion of value, and it shouldn’t be taken seriously, however it is important to know everything that goes into that opinion. It is not just the throw of a dart but rather a well thought out process that involves analyzing local market data to arrive at a non biased opinion of value. Let’s take a look at how homeowners can develop a more realistic home price perception by understanding the above principles.
Cost vs. Value
In the past I’ve discussed the idea that cost does not always equal value, and I think now is a good time to reemphasize this point. Cost is what you pay to make an improvement on your home. An example of this might be the fact that in order to install a swimming pool you must pay the pool company $25,000. The value of that pool is what others are willing to pay you for it when you sell your home.
If your home is worth $100,000 without a pool, and you install a pool for $25,000 and then sell your home for $125,000, then the cost of the pool does equal its value. This is not always the case however and many times you will get less than the actual cost. If you could only sell your home for $115,000, then the value of the pool is $15,000. This value is not made up by the appraiser but rather is arrived at by the market of buyers for the house. The appraiser’s job is to measure the characteristics of the market and then report them.
If a homeowner thinks that cost does equal value then their home price perception will be incorrect because they will think their home is worth more that what it is. In order to correct this misperception they must know what the value of a pool is and that they may not get a 100% return on their investment. If the homeowner in the example above knows this then they may estimate the value of their home to be $115,000 instead of $125,000.
Lack of knowledge of their homes physical characteristics
This sounds like a small or insignificant item but I thought that it was worth mentioning because I have seen examples of it. If you think your home is larger than what it is (or smaller) then you may have a skewed home price perception.
With all else being equal with a home, the larger the square footage the more it will be worth. If you think your home is 2,000 square feet when in reality it is 1,500 square feet then you will obviously think it is worth more.
It is important to know the correct square footage of your home especially when you want to sell it. While price per square foot is not the best way to price a home there are still many agents who use this method. If your home is priced higher than what it is worth because the agent used an incorrect larger square footage, then this may keep it from selling. If you do get a buyer to sign a contract but the home does not appraise then the seller could have bad feelings towards the appraiser, when in reality the value is correct because it reflects the correct square footage of the home.
The is an easy misperception to correct because there are various ways to find out the correct square footage of your home. The best method is from an appraiser because they actually measure the home using national standards. You can find this square footage on a previous appraisal if you have one or you can hire an appraiser to measure it for you.
Inaccurate information regarding recent home sales
One of my favorite stories to tell that illustrates this point involves a past prelisting appraisal client of mine. My client had listed his home for sale based on what he thought his neighbor had sold his house for. The neighbor had not been totally truthful when passing along the price he was paid. I performed an appraisal for my client and was able to base my opinion of value on accurate data and as a result he sold his home shortly thereafter.
It is difficult for homeowners to be able to track down all of this information on their own, however there are simple things that can be done to help you get more accurate information than hearesay. Some places that you can look to find out the accurate sale price of a home includes county records, which are available online in most areas these days. While Zillow gets some bad press on their bad “zestimates” they do provide pretty good information on home sales, including when a home sold and for how much.
The solution for bad information regarding recent home sales is to know where to find this information. If you can verify the prices of recent sales in your neighborhood this can go a long way in helping you have a realistic home price perception. If you have accurate information regarding your home’s size and an idea about cost and value then knowing the accurate sale price of recent sales in your neighborhood will help you better understand what your home is worth.
Lack of knowledge regarding local market conditions
Many homeowners lack a good understanding of local real estate market conditions and that is understandable. While you don’t need to be a local real estate expert to have a good home price perception there are some things you may want to make yourself aware of.
The value of real estate is tied directly to supply and demand. Most of us learned in basic economics that when there is a scarcity of a product then the value typically increases. Likewise, when there is an oversupply the value of that product will go down. Knowing what the general real estate climate is in your area is is key to understanding your own home’s value.
One extreme example of this occurred in the area I appraise in, as well as others I’m sure. Right after the collapse of the real estate market many homeowners were caught off guard with how this would affect their home’s value. An imbalance in supply and demand was created when there were more homes available on the market through foreclosures and a lack of demand due to overly strict lending guidelines. This drove property values down, however most homeowners still had the perception that their home was worth more. While this is an extreme example it illustrates the importance of knowing how the local supply and demand for homes will affect your home’s value.
To get a better understanding of your local market conditions you can make note of how many homes that are similar to yours are for sale in your neighborhood or other similar ones. You can also be on the lookout for new construction because it typically signals that the market is demanding more home inventory which is also a good sign of demand . When there are a lot of homes for sale and the demand hasn’t changed, or even decreased, then the prices will typically go down because it is a buyers market. The opposite is also true. If you keep an eye on these characteristics in your area then your home price perception will be more realistic.
Conclusion
If you are able to understand the relationship between cost and value, become more knowledgeable about the physical characteristics of your home, obtain the most accurate information about recent comparable home sales, and understand the market conditions for real estate in your area, then you will be well on your way to having a better home price perception.
Have any questions about home price perception?
Do these concepts about what drives property values make sense to you? If you have any questions about what I’ve discussed leave me a message below and I’ll do my best to answer them for you. If you have anything else to add lets continue the conversation and leave a comment below. Thanks again for reading.
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This goes to show there is so much that goes into value. It’s a real juggling act to consider everything.
That’s true Ryan. Hopefully homeowners will understand this when estimating the value of their home.
Nice post, Tom !
Thanks Wendell.
I like that you mentioned the price perception index. It is interesting that when times are good and prices are going up quickly, homeowners get surprised more often by how much their home is worth, but when times are bad, homeowners are usually disappointed to find out what it is worth. Overall, there is a tendency to think your own home is worth more than it actually is, but that makes sense. Most of us love our homes and we choose our home based on it being better (to us) than anything else we could get for the same amount of money. So of course, when we see homes around our home selling, we naturally think, my home is better (to me), so it must be worth more than these other homes. However, the market may not judge your home the same as you do and things you love might just be a small factor and things that don’t bother you too much might be issues. As an appraiser, I cannot tell you how many times a homeowner has taken me upstairs to the second floor and asked me to look out the window while standing on my tiptoe to check out a “million dollar view” on a $200,000 home.
I agree that we all look at our own homes with rose colored glasses, and you’re right, it can change depending on the situation. Good to know homeowners in your area are no different than around here.