For buyers who simply want a home in which to raise their pets, plants and kids, these are tough times. They’re made harder by low interest rates, tight housing inventory and pandemic-driven desires for more rooms inside and more space outside. All this is further complicated by an unprecedented number of cash buyers flooding many markets. Still, residential real estate can be a great investment, particularly if you’re in it for the long run — and you can handle the mortgage debt and maintenance you take on.
If you’re throwing your hat into the housing ring, it’s helpful to have a relatively easy way to determine whether the price of a home — and, ultimately, your offer — makes sense.
Is Your Dream Home Worth It?
Let’s say you know the must-haves for your new home and have determined your price range. Then, voila! Your dream house becomes available and your agent is already setting up a showing. But there’s one hitch: The house has only been on the market for hours and there are already dozens of potential buyers clawing at the picket fence.
It’s highly likely that this home will go for quite a bit more than the asking price — anywhere from 10% to 40% over isn’t unusual in the current market — and this upward bidding would make your dream home one of the most expensive in the neighborhood.
So, you’re wondering, is it worth it?
You may be familiar with “comps,” which in real estate parlance are recently closed comparable transactions. These are homes that generally reflect the home you want in terms of neighborhood, size, amenities and other intrinsic and extrinsic factors that impact price. Lenders typically use them to gauge price validity for underwriting decisions. Real estate agents use them to help buyers and sellers understand what similar homes go for these days.
This information can also help you determine if you’re making a smart financial decision or getting caught up in a frenzy:
Understanding volume helps you spot anomalies. The first goal is to determine if the home falls within a typical price range or if it’s an outlier. For this, figure out what percentage of comparable homes are currently for sale or have recently closed at a price close to your potential offer. The more homes there are at or near that price, the more secure you can feel about your offer — clearly, the opposite holds true, too.
Figuring out how quickly prices have risen to this level gives context. The second goal should be to determine the rate of price increases. In residential real estate, a price increase of 2% to 3% annually is standard, while the current double-digit rates are anything but typical. With just about any asset, including housing, if the speed at which the asset price increases is way ahead of the norm, then that can be an indicator that the price may be overly inflated.
Create Your Own Data Set To Assess Price Validity
If you’re entering the market and are concerned about whether your home will end up being the highest-priced house in the neighborhood, it’s useful to put together your own volume and velocity information, which is rather simple to do. Most of the data you need to create a profile specific to your neighborhood, or even your prospective street, is readily available online.
You can find current listing data and, often, closed-sale information on websites like Realtor.com and Zillow; closed-sale data is also available online through most municipal and county property-recording and tax-collection websites. And you don’t have to go overboard — find three to five currently listed properties and a handful of recent sales — your agent likely already has this for you. Then, look online for a few comparable sales for a year ago, three years ago and five years ago to find the trends.
One important caveat: Transactional data for residential real estate typically has a 30- to 90-day lag that, under these market conditions, isn’t ideal. Still, considering volume and velocity, you’ll come away with a clearer picture of the trends and can make a more informed decision.
When Value Is More Important Than Price
Buying real estate as an investment is vastly different than buying a home that you plan to stay in for years — and only you know the value of that variable. If you’re willing to spend more now because you’re banking on this sellers’ market lasting and you plan to cash out in a couple of years, then that’s a risk you take as an investor. But if you simply want a place to call your own for the next decade or two, then these metrics and any others may mean relatively little compared to a lifetime of happiness in the home of your dreams.