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What is important when pricing a home?

Below is the most viewed blog in the last 30 days. We re-posted it in case you missed it.– The KCM Crew

We have shown how even the experts are having trouble determining price in the current real estate market. There are so many moving parts and each part is evolving rapidly. Today, we want to look at the major determining factors in establishing the current value of a residential property.

If you currently have your house on the market or you are considering selling it in the near future, make sure you find a local real estate professional. Request them to explain each of the following points and how they apply to your region or neighborhood. You will be better prepared to determine the best option for you and your family once you have this information.

1. Demand for a Particular Type of House

We realize each home has a unique value based on its amenities; however, buyers look at certain basic requirements (ex. style, number of bedrooms, school district, and proximity to mass transit). You should look at your home and see which category it would fall into. For example, you might have a 4 bedroom colonial in a certain school district. Ask the real estate person you are working with to give you a list of the homes in this category that have sold in the last six months. This will give you an accurate depiction of what homes like yours are actually selling for.

But don’t stop there. Take the six month number and divide it by six. That will help you determine the approximate number of buyers that will purchase a home like yours each month.  Then go to the next step.

2. Supply of a Particular Type of House

Have the agent prepare a list of all houses like yours currently on the market. Divide that number by the number of monthly buyers you determined above. That will give you the month’s supply of inventory of available homes like yours. (Example: 24 buyers in the last six months divided by 6 months equals 4 buyers a month. There are currently 40 homes like yours for sale so divide that number by the 4 buyers per month that buy which equals 10 months supply.)

Once you have that number, you can put the principle of supply and demand into play. In real estate:

  • 1-4 month’s supply constitutes a seller’s market where prices have a good chance to appreciate
  • 5-6 month’s supply constitutes a normal market with stable prices.
  • 7+ month’s supply constitutes a buyer’s market where prices have a good chance to depreciate

Now take the average price of houses like yours that sold in the last six months and adjust that price depending on which market you are selling in.

  • If it is a normal market, list your home at the average price.
  • If it is a seller’s market, add 10% to the average price and start there.
  • If it is a buyer’s market, deduct 10% from the average price. (Remember, in a buyer’s market there is an excess of inventory supply. That will mean homes will depreciate.)

All of the information above should be readily available to your local real estate professional. They will be ready to share this with you if you ask them to prepare a Comparable Market Analysis (CMA) on your home.

You now have a good idea regarding today’s value of your home. However, do not allow your agent to stop there. Other factors will impact the price at which your home will sell. Let’s go over them now.

3. Interest Rates

The interest environment has a major impact on home values. The demand for housing increases when rates are low or falling. The demand for housing weakens when rates are high or rising.

Rates are at historic lows today. However, most experts expect rates to climb steadily throughout 2010. As they rise, buyers will be eliminated because they will be priced out of the market. Others will have to buy a home for a lesser price in order to keep the mortgage payment within their monthly budget.

Simply put, there will be a downward pressure on prices as rates increase.

4. Employment Rates

Regional unemployment rates are an interesting dynamic when pricing residential real estate. A person without a job obviously can’t buy a home, so areas with high unemployment have less potential purchasers.

There is also another interesting effect the local job situation can have. If the unemployment rate is rising quickly, many people refrain from making big ticket purchasers out of a fear that they might be next. If you are in an area where the unemployment rate has risen lately, the demand for housing will have fallen. That change in demand will impact prices in a negative way.

5. Foreclosures In the Area

We believe that this factor will impact housing values the most in 2010. We define this ‘shadow inventory’ as the number of foreclosures currently held in banks’ inventories, the number of homeowners seriously delinquent on their mortgage payments (potential foreclosures), and the number of borrowers willing to ‘walk away’ from their mortgage obligations.

There will be a dramatic effect on home prices. When and to what degree these discounted properties will be released to the market will determine the severity of the impact.

6. Consumer Confidence

All of the above factors combined will determine whether the American people have an appetite for real estate. The factors will also determine at what price points purchasers will enter the market. If the real estate market seems to be gaining traction, people will buy. If it seems to be about to take a ‘double-dip’, the purchasers will retreat to the sidelines. The next couple of months will shed light on this factor.

What does this mean to you?

Piecing all the factors together, we believe that now is the best time to sell if you plan to sell this year. We feel strongly that prices will continue to weaken as the year unfolds.

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