Home prices are on fire and bidding wars are raging. In the heat of this real estate moment, it’s possible you just might pay too much for that house.
In much of the country, the coronavirus pandemic has created an imbalanced housing market, reducing supply and spurring demand. As a result, prices have jumped. The National Association of Realtors says the median price of homes sold in September soared nearly 15 percent from a year earlier.
A driving factor is that mortgage rates are near record lows, spurring buyers to bid up prices even more.
The good news for buyers is that few observers foresee a crash coming. The most pessimistic economic forecasts show home values flattening or declining modestly.
However, as the Great Recession showed, there’s no guarantee that the house you buy today is priced reasonably, or will appreciate, or will even hold its value. The best anyone can do is to use the tools and information available to make an educated guess. For buyers, this means talking to your agent, doing some research and putting on your game face — today’s intense seller’s market is creating difficulty and drama for buyers.
Here are a few indicators that can help you determine whether the house you’re eyeing will hold its value when the real estate market cools.
1. That listing is getting stale
One telltale sign that a property is overpriced? The home has languished on the market for months. That’s rare these days but it is something to beware of.
Ask your agent to pull statistics on the house you’re eyeing. How long has it been listed? Is that longer than average for homes in the neighborhood? In that price range? For the type of house? Has the seller previously marketed the house and then removed the listing?
“The stats will vary depending on price, property type and even geography. What’s important is to understand what’s average for the property you’re looking at,” says Terra Spino, an agent at EXP Realty in Cheyenne, Wyoming.
Lower-priced homes tend to sell quickly. Mega-mansions can sit for years before finding the right buyer.
“High-priced homes, typically ranging from $750,000 to $1,000,000, will sit on the market longer than less expensive property,” Spino says.
2. The house is nice, the neighborhood not so much
Generally, homes depreciate over time while land increases in value. The idea here is that your home suffers wear and tear, whereas land does not. A brand-new home in a so-so neighborhood might be worth less in a few years than a comparable older home in a great neighborhood.
Consider that homes bought near less-desirable school districts suffered a 22 percent location discount when compared with all homes in the same county, according to a report by Realtor.com.
Evaluate the features of the area where the prospective home is located. Look at growth opportunities, such as new businesses and mixed-use developments.
“Today’s buyers want to live in walkable neighborhoods. That has value that will probably last,” says Kelly Lavengood, a Realtor at F.C. Tucker Co. in Indianapolis. “Answer questions like: is the area primed for additional growth?”
Additionally, look for features including nearby mass transit, high-rated schools and amenities such as parks and popular public spaces.
3. Valuation tools point in the wrong direction
Online valuation tools, also known as automated valuation models, or AVMs, are easy ways for buyers to get an idea how much a property is worth.
These tools use information from property transfers, taxes and past sales to crunch the numbers to estimate a property’s value. This is a good starting point, but not always an accurate picture, says Lavengood. Experienced agents who know the area can put a finer point on home values than online tools.
“Find an agent who is familiar with the area. Real estate is very market specific, so what’s good for one neighborhood might not be good for another,” says Lavengood. “Property values on websites are not always accurate.”
4. The inspection sets off warning bells
Once your bid on a home is accepted, a home inspection will give you additional clues as to market value. Be sure to hire an inspector with experience who comes with excellent recommendations.
A good inspector will also know their limits, meaning if something outside of their expertise demands attention, they will recommend the right type of expert to review the problem.
“Be cognizant of potential inspection issues. Everything’s fixable — it’s just a matter of at what cost and whose cost,” says Lavengood. “You want to make sure you’re not getting into a situation where you can’t afford repairs and it impacts your ability to sell.”
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