Price is different than value
I’ve heard, “A home is worth what someone will pay for it” but doesn’t always apply to real estate. In reality, a home is worth what an underwriter says it’s worth. Why? Because nearly nine of 10 homes are financed by a mortgage, and lenders will lend no more than what an appraiser says a house is worth along with the final approval of the underwriter of the loan.
If the contract price is higher than the appraised value, the buyer, and/or seller must figure out how to make up the difference or the deal is dead. Appraisal issues kill about 11% of the deals in todays market.
One way to think about the difference between price and value is longevity. Prices reflect temporary shifts in supply and demand — like tight inventories or heightened demand due to low-interest rates.
Prices reflect temporary shifts in supply and demand. Values are long-term and change slower.
Values are more long-term and change slower than prices. However, price changes do change values over time because appraisers use prices or sales of comparable homes during the previous six months to make an appraisal. As more homes in a market are appraised, recent sale prices will change values.
Every house has a unique value and responds differently to market changes. In today’s market, sellers should price their homes very carefully and research local conditions to avoid overpricing that could lead to an extended time on market in case prices do decline.
Buyers and investors should be careful to avoid buying a home that is on the verge of losing value. Determining an individual home’s value is difficult.
The “find your home’s value” calculators from public sites like Zillow are highly inaccurate, and they often mislead buyers and sellers. The main reason these values are inaccurate is the data doesn’t include features or conditions of the property or many other factors that contribute to value. The only real way to accurately find out what your home value is would be to have it appraised by a licensed appraiser or have a Realtor do a Comprehensive Market Analysis or a “CMA” for you.
Medians and averages
A median is that number where half the numbers are lower, and half the numbers are higher. In the case of real estate, that means that the median is the price where half the homes sold that month were cheaper, and half were more expensive.
An average is the total of those numbers divided by the number of items in that set. An outlier, or a value much higher or lower than the others in a group, changes the average but not the median. Medians are preferred in real estate because they give a better idea of where the middle of the market lies.