When considering a home purchase, or a mortgage refinance for that matter, knowing the true value of the subject property is paramount.
Getting a precise assessment of what a property is worth is one of the most important aspects of real estate, and especially critical to the bank or lender providing financing.
After all, it is the bank that technically owns your home until the mortgage is paid off, so they too have a financial interest in the property in question, often a far bigger one than the borrower.
For example, if you only come in with a 3% down payment on the purchase, the bank is on the hook for the remaining 97% of the home value. That’s a big chunk of change.
The House Is the Collateral
- How much of your home do you actually own?
- If you have a large mortgage on your property
- The lender might technically own most of it
- Until you pay it down and/or home prices increase
From the lender’s standpoint, the house itself acts as collateral, so it is imperative to have an accurate appraised value when providing mortgage financing.
This is also very important to the seller, who will want to list their home for the highest price possible, but also to the buyer who will want to acquire the home for the lowest price. Real estate agents will also want to get this right so they can maximize their commission.
And while a buyer and seller can agree to any price, even if it exceeds the market value, an independent appraisal is often used to substantiate the value agreed upon. An appraisal is conducted by an objective third-party to provide an accurate market price based on the attributes of the home, its location, recent comparable sales, and so on.
To summarize, if you’re curious what your home is worth, it’s essentially what someone is willing to pay for it at any given time, but if the buyer needs a mortgage to finance it, the bank will also have to agree on that valuation.
Getting an Online Home Value Estimate in Seconds
- Online home value estimates are great
- In that you can get one in seconds for free
- But the fact that you can do that
- Reveals their limitations as well
Appraisals used to be hard to come by unless you hired a professional, but thanks to the advent of the Internet and related technologies you can now pull up a home valuation in seconds.
Nowadays, several real estate websites, like Zillow, Redfin, and Trulia (to name just three) offer a great deal of information on virtually every residential property in the United States, including home value estimates.
Zillow is probably the frontrunner in the home value estimator business, with its Zestimate now a household name. I’ve written about those at length. There’s also a smaller company called Eppraisal, but their value estimates seem pretty weak and unexceptional.
In short, the estimate or value Zillow comes up with might be far off or spot on, depending on the local market and recent comparable sales. This why real estate agents often say to ignore them.
From what I’ve seen, the data always seems to be delayed, and thus the home values tend to lag reality. If anything, you can get a quick little ballpark figure, and you can track it over time to see which way the market is headed.
But you can’t actually use these estimates for anything more than entertainment value. A bank or mortgage lender won’t take them seriously, and they’re often susceptible to massive swings in value. This is especially true if they tweak their algorithm for whatever reason.
However, these websites also provide a lot of other useful information such as recent sales nearby the property, saved searches, current mortgage rates, mortgage calculators, and the all-important transaction history for the subject property. It’s good to know what the property sold for in the past before you go overpaying for it…
If you aren’t ready to pay for a full home appraisal, try the free appraisal tool from Zillow to get a quick, ballpark estimate of the value of your home. It’s far from perfect, but you get what you pay for.
Recently, the Redfin Estimate was launched to rival the Zestimate, with the former boasting a lower error rate because it is apparently more data-driven. You can check out both to get a better range of value.
I find that the Redfin Estimate is more current, that is to say, takes into account very recent home sales, whereas Zillow seems to lag a bit, as noted above. Obviously, this can make one estimate higher than the other, depending on which way the market is heading.
In any case, it’s helpful to compare the Zestimate to the Redfin Estimate to get an idea of what a home is worth, as two estimates are better than one. You can also see which comparable sales were used to determine how they came up with the estimated home price.
From there, you might want to perform a more in-depth market analysis with a real estate agent if you have plans to sell your house. The report will rely on recent home sales in your housing market to gauge the current value of your home.
Figuring Out Which Way Home Prices Are Headed
- If you want to know if home prices are going up or down
- Pay attention to the many housing reports that are released
- But understand that real estate is local
- So your own market might not mirror what is happening nationally
The Pending Home Sales Index: this is NAR’s forward-looking indicator based on contract signings. It tells us what we might expect in coming months, as signed contracts typically translate into home sales within one to two months.
Existing Home Sales: this is NAR’s measure of completed transactions that includes single-family homes, townhomes, condos, and co-ops. It tells us what homes actually sold for, how long they took to sell, and whether inventory is contracting or growing.
Housing Starts: The New Residential Construction report from the Census Bureau provides monthly data for permits to build new homes, “housing starts,” which are residential housing projects that have actually broken ground, and housing completions. It’s helpful in determining the health of the real estate market. If more new homes are being built, it might indicate tight supply of existing homes. And more construction means more jobs, and likely trickle down effects in consumer spending.
New Home Sales: this is the Commerce Department’s (also Census Bureau) measure of newly-built home sales. These numbers are based on contracts or the acceptance of a deposit, which economists argue provides a more current gauge of real estate activity. They also report median prices of new homes and current supply. Here you get a better idea of demand for those newly-built properties.
S&P/Case Shiller Home Price Indices: these popular home price indexes track single-family home prices and are calculated each month using a three-month moving average. They track both national both home prices and 20 major metropolitan regions. The index levels are published with a two-month lag and released on the final Tuesday of every month.
The problem with national home price indices is they don’t tell you much about your own housing market. Who cares what home prices are worth in South Carolina if you live in San Antonio, Texas.
Freddie Mac’s MiMi: if you want a local gauge, check out the new housing market health tool from Freddie Mac, which calculates whether housing conditions are weak, in range, or elevated, on both the national and state level, along with the metro level. This can help you determine if homes prices in your area are on the rise, flat, or declining.
Tip: If you want a quick estimate of what your home might sell for, look at the most recent sales in your area using Redfin. As noted, they have the most current data. For example, if you own a 3-bedroom, 2-bath house, filter similar results and perform a mini market analysis on your own to assess current market value. Then determine the average price per square foot paid and multiply it by your square footage. It’s not perfect, but it’ll give you a decent idea in no time at all.
Just remember that whatever you think your home is worth, you’ll always be at the mercy of what someone is willing to pay for it, or what the appraiser believes it’s valued at.