Home prices in the U.S. have risen more or less steadily over the last few years. In many cities, home values are now at their highest point in history -- even higher than the last housing boom.
But what determines the "market value" of a home? How do sellers determine their list prices, and how can buyers evaluate a listing based on current market conditions. Here's a crash course in determining market value, for sellers and buyers alike.
The Definition of 'Market Value'
Let's start off with a quick definition. In a real estate context, the "market value" is the most likely price a home will sell for within a reasonable amount of time. It is based on local housing market conditions and recent sales activity.
You'll notice this definition does not mention the original price paid by the homeowner. Unless they bought the home a month ago, the original purchase price is likely irrelevant to the current market. Likewise, the market value of a home has nothing to do with the homeowner's current mortgage balance. Some sellers list their homes for the amount needed to pay off their mortgage loans. But that doesn't always line up with the current market value of the property.
How to Determine Market Value
So, with that introduction out of the way, let's get to the heart of the matter. How do you know the market value of a home you're thinking about buying? Or the value of your own property, when listing it for sale?
The first thing you'd want to do is track home sales in the area. The longer you do this, the better. It gives you a good base of knowledge with regard to asking prices versus selling prices (hint: it's the latter of these two that determines market value).
Next, you'll want to review sales data on homes that are similar to the one you're considering. This is what real estate agents refer to as comparable sales, or comps. The more alike the two properties are, the more accurate the pricing comparison.
Try to find as many comparable home sales as possible. This will help you support your offer amount, by showing the seller you're using actual market data from recent sales in the area. Remember, home prices can change over time. So recent comps will give you a better idea of what's happening now, in the current real estate market.
When you determine the market value of a home, you also need to take any unique features into account. For example, let's say I've found sales data for two colonial-style homes that are 2,000 square feet. The home I'm considering is also a colonial with 2,000 square feet. But it has a completely renovated kitchen, a pool, and sits on a more spacious corner lot with a great view. The other houses lack these qualities. So the house I'm considering will likely sell for more than the two comps, despite the fact that the homes are similar in size and style.
Here's a good "formula" to keep in mind when considering the market value of a home in a particular area:
Comparable sale prices + unique features = a good asking price
An Easier Way: Work With a Real Estate Agent
This is just a basic overview of market value within the context of real estate sales. There's more work involved to properly evaluate the value of a particular property, especially when the market is changing constantly. And that's where real estate agents come into the picture.
Real estate agents undergo extensive training in this area. Much of their education has to do with real estate market cycles, home prices and values, and related topics. So whether you're buying or selling a home, you could save yourself a lot of time and energy by having an agent on your side!
5 Tips for Making an Offer in a Hot Real Estate Market
Steady demand. Limited supply. That's what we are seeing in real estate markets across the country right now. Inventory is particularly tight within the lower price ranges. "The starter house is nearly missing in some markets," according to Jessica Lautz, managing director of survey research and communication for the National Association of Realtors.
Of course, conditions can vary from one city to the next. But the overall trend in housing markets across the country is that supply is still falling short of demand.
Given these conditions, it's important for home buyers to make a strong, smart offer when the right house comes along. Here are five tips for doing exactly that.
1. Understand the supply and demand situation in your area.
According to housing experts, a so-called "balanced" real estate market has five to six months of supply. This means, in theory, that it would take five or six months to sell off all homes currently listed for sale, if no new properties came onto the market.
Many real estate markets across the country have less than a three-month supply right now. And some cities have less than a two-month supply.
The first step to making a strong offer is to understand the supply-and-demand situation in your area. We are still seeing sellers' market conditions in many cities, as of spring 2018. And this could persist for some time.
2. Study recent sales prices in your area.
This is something a real estate agent can help you with, but you can do some of it for yourself. The idea here is to get a good understanding of recent sales prices in the area where you want to buy.
This will help you in a couple of ways. It will save you time during the house-hunging process, by eliminating the need for repetitive research and pricing "sanity checks." It will also help you make a strong, realistic offer backed by recent sales trends. And speaking of offers...
3. Make a strong and timely offer, backed by comparable sales.
In a slow housing market, where sellers are ready to jump on the first offer that comes along, home buyers have the luxury of taking their time. A buyer might start off with an initial offer below the asking price, just to open negotiations. The seller would probably come back with a counteroffer, or accept the first offer.
But it doesn't work that way in a more competitive real estate market with limited inventory. In a tight market, buyers are better off making their first offer as competitive as possible. Otherwise, the house could go to a competing buyer.
4. Consider writing a love letter to the seller.
A house love letter, that is! Recent studies have shown that buyers in competitive real estate markets can improve their chance for success by writing a heartfelt letter to the seller. Sure, real estate is a business transaction. But there's a personal side to it as well. Writing a personal letter to tell the sellers what you love about their home might just tip the scales in your favor.
5. Get an agent on your side.
It's always a good idea to have help from a local real estate agent. It's even more important in a tight market with limited inventory. An agent can help you move quickly, putting together a strong offer that's supported by recent sales data.
How to Prepare for a Competitive Real Estate Market
Home buyers who are planning to enter the real estate market can benefit from having their financing arranged ahead of time. What does that mean exactly, and why is it so important in the current real estate market? Here's what you need to know.
Many real estate markets across the country are highly competitive right now due to a lack of supply. There are plenty of people in the market looking to buy a home, but there's not enough inventory to go around. This supply and demand imbalance puts upward pressure on home prices and makes things more competitive for buyers.
Mike Fratantoni, chief economist for the Mortgage Bankers Association, recently cited this as one of the primary factors influencing the market right now. "The major constraint in the market right now is the lack of supply," Fratantoni told CNBC. "The absolute number of units on the market is near an all-time record low."
Competing in a Tight Real Estate Market
In a competitive real estate market, home buyers want to have every possible advantage going for them. Among other things, home buyers can benefit from having their financing lined up ahead of time, before they even start looking at houses.
This might mean one of two things, depending on your money situation:
- If you're planning to pay cash for a house, the seller will probably want to see bank statements or a "proof of funds letter" from the bank proving that you have the funds in the bank.
- If you're like most home buyers, and you will be using a mortgage loan to help finance your purchase, the seller will probably want to see that you've been pre-approved by a mortgage lender already.
Benefits of Mortgage Pre-Approval
Mortgage pre-approval is basically a kind of financial pre-screening process. This is where a bank or mortgage company reviews your current financial situation to determine (A) if you're a good candidate for a home loan, and (B) how much you can borrow. This helps you, the buyer, in two ways:
- Getting pre-approved for a mortgage can help you narrow down your housing search to the kinds of properties you can actually afford, based on your financing. This will make your house-hunting process more efficient.
- Mortgage pre-approval could also make sellers more inclined to take your offer seriously, since you've been working with a mortgage lender already.
Both of these things could give you a much-needed advantage in the marketplace. This is especially important in an active real estate market where homes are selling quickly, and where multiple offers are a common occurrence.
The current inventory situation across the country also underscores the importance of having professional help from an experienced real estate agent. An agent can help you find a property that meets your needs, evaluate the seller's asking price, and make a strong offer in a timely fashion. This is the key to success in a competitive real estate market.