One of the first things aspiring real estate investors often want to know is how to determine real estate values. After all, it's only after taking a closer look at the valuation of a property that you can determine whether now is a good time to buy or sell.
With that in mind, here's a guide to real estate valuation. Read on to learn about the current state of the market, how the real estate valuation process works, and how you can figure out the value of a property as an investor.
A closer look at current market data
Nationally, an imbalance of housing supply and demand has led to rising home prices, according to recent data from the National Association of Realtors (NAR). As of August 2020, the median home value nationally rose to $310,600, representing 11.4% year-over-year growth from $278,800 in August 2019. Notably, the data shows prices increased throughout every region of the country.
For its part, total August housing inventory sits at just 1.49 million units. That figure is down 18.6% from a year prior, when inventory stood at 1.83 million units. Additionally, unsold inventory is at a three-month supply, also down noticeably from a four-month supply in August 2019.
Meanwhile, the number of existing home sales, or completed transactions, continues to climb. Nationwide sales numbers grew 10.5% year over year, increasing from a seasonally adjusted rate of 5.43 million in August 2019 to a seasonally adjusted rate of 6 million in August of this year. While each of the four major U.S. regions is seeing both month-over-month and year-over-year growth here, the Northeast is seeing the biggest increase.
As for what's behind this imbalance in the housing market, historically low mortgage rates plus slowly recovering job growth can be tied to the influx of buyers interested in purchasing homes. Additionally, housing inventory has been limited in recent years, and it's likely the problem will only get worse as a result of the continued wildfires in California, which have caused a surge in lumber prices prices that will undoubtedly hinder the pace of new construction.
How real estate values are determined
Now that you know more about where the current real estate market stands, the next step is to learn how values are determined. Truthfully, there are three different ways a home's value can be found.
Using the FHFA House Price Index (HPI) calculator
If you want to see how much your home's value has appreciated over time, the best way to find out this information might be to use the Federal Housing Financing Agency's (FHFA) House Price Index calculator. This tool tracks how a home's value has changed from one transaction to the next, using data gathered from decades of mortgage transactions to see how home values fluctuate in a given market.
That said, this tool is not perfect. In particular, it only gathers data from conforming loans. Additionally, the data is not seasonally adjusted or for inflation. Still, if you want to get a broad idea of what your property might be worth, it's a good place to start.
Asking for a comparative market analysis (CMA)
When you're ready to put your home on the market, your best bet is to ask a real estate agent to prepare a comparative market analysis. As the name suggests, this document compares your home to recent sales (comps) in your area to see how it stacks up.
Typically, your agent will compare the homes on a variety of different factors, including square footage, the number of bedrooms and bathrooms, and any recent updates or amenities, to come up with an estimated value for your property. That figure is usually used to help determine a listing price when the home is put up for sale.
Conducting a professional appraisal
Finally, for the most accurate form of home valuation, you'll want to hire an appraiser to conduct a professional appraisal. Usually, this method is used when a buyer needs to be approved for financing or if a homeowner is refinancing their mortgages their mortgage. An appraisal is considered the most accurate way of determining current market value of the home.
During the appraisal process, a professional appraiser will first do an evaluation of the home. Like your agent did with the comparative market analysis, they will look at factors like square footage, the number of bedrooms and bathrooms, and any upgrades in order to determine the fair market value of your home. Once that's done, they will also look at recent sales to see how your home compares.