Former art and design instructor Christine Bartsch holds an MFA in creative writing from Spalding University. Launching her writing career in 2007, Christine has crafted interior design content for companies including USA Today and Houzz.
As a property owner, you can assert some control over the value of your home with diligent upkeep and selective home updates. At the same time, dozens of factors large and small impact the state of housing as a whole and how real estate performs on a local level.
A global event that shakes consumer confidence could suddenly cause homebuyer demand to take a nosedive and put downward pressure on home prices. Meanwhile, the development of a new shopping center near where you live might add thousands of dollars to your home’s worth over time.
National trends matter, but so does whatever’s happening in your backyard. When you think about real estate property values, it’s impossible to get the full picture until you understand both sides.
Knowing that, let’s cover the top five macro and micro factors that influence residential home values.
When the economy’s shaky, people worry about salary freezes, rising prices, and getting laid off or fired with little hope of finding another job—which means they’ll worry about losing their house.
And while falling behind on rent might get you kicked out of an apartment, missed mortgage payments lead to defaulting on your loan, losing your house and long-term credit damage.
Plus, people worried about losing their homes are less likely to take the risk to buy one.
However, when the economy’s going strong, people are more confident that they’ll be able to get another, maybe an even better job, if they leave or lose their current position.
That’s why top-notch agents watch economic factors like job growth, unemployment rates, and the Housing Affordability Index.
“Unemployment, interest rates, and the economy absolutely play into real estate market trends,” says Brenda Geraci, a top agent in the Los Angeles, CA suburbs with 17 years experience helping sellers and investors properly price their properties.
“Right now, the economy is strong, unemployment numbers are low, and interest rates are trending downward, and that gives buyers more buying power—they can afford a better house when economic conditions are good.”
Consumer confidence and consumer sentiment are so important to the economic health of the U.S., that these trends are tracked by multiple organizations.
When consumer confidence is strong, people are more likely to spend the money they’re earning—especially on major purchases like a house.
However, even in times when home values trend upwards overall, prices could remain stagnant or fall in some parts of the country due to other factors.
Inventory, or months of supply, is the calculation of how long it would take for currently listed homes to sell out. Let’s say 100 homes sell every month and there are 600 homes on the market, that equals a six-month supply of inventory.
In most markets, a six months supply is considered a balanced market—meaning there’s an equal ratio of buyers to homes for sale.
Markets with a below six-month supply are considered low inventory, meaning there are more buyers than available homes—making for seller’s market conditions.
Above a six-month supply and you’ve got buyer’s market conditions, where there are more homes listed than there are buyers house hunting.
What does this all have to do with home values? In short, high demand and low supply push prices up. Low demand and high supply have the opposite effect. If there are more homes than there are buyers, that puts downward pressure on prices, and vice-versa in a seller’s market when homes are in tight supply.
As a seller in a market with lots of houses for sale and low demand, it’s more likely that you’ll have to price competitively or face a price cut down the line.
“Once your house spends too many days on the market, say for 30 days or more, then usually there’s a price reduction to help it sell—and that is just bringing down the value of your home,” says Geraci.
Looking at current market trends also helps in predicting the future of home values. The Federal Housing Finance Agency tracks these trends among single-family house prices with the House Price Index.
And while home values historically trend upward, they’re known to fluctuate or fall in the short term.
“When home prices start to fall, a lot of buyers wait out the market, watching the trends of these home prices going down, down, down,” says Geraci.
“So, you need to hire an agent who’s a local expert and really understands the trends in your particular neighborhood, because recent trends within the last four to five months can really impact your home’s value.”
And when buyers wait out the market, that results in fewer active buyers. And fewer buyers leads to higher inventory, and lower home values.
When it comes to real estate, what goes down, must come up. If your home value has recently decreased, analyzing home value trends can indicate how long it will take for it to rise again.
On the surface, it seems like mortgage interest rates only matter to home buyers, but home sellers need to take note, too, because interest rates can impact home values.
There are a number of nuanced reasons why interest rates impact home values that involve capital flow and lender risk. However, the easiest way to understand this influence is again through the basic principle of supply and demand.
A lower interest rate allows more of the buyer’s monthly payment to go toward the principle, which means they can afford to buy a higher value home. A higher rate means a higher mortgage payment, which reduces the purchase price they can afford.
For example, let’s say that a buyer can afford a $500,000 home at a 4% interest rate. Well, if they can only get a 5% mortgage rate, that’s an extra $50,000 going toward interest instead. So, your buyer can only afford a $450,000 home at that 5% rate.
In essence, a 1% rate hike increases the cost of the house by 10%.
The higher interest rates rise, the fewer buyers there are who can afford to buy a house—because it eventually becomes cheaper to rent instead.
When buyers drop out of the market, inventory rises. And as inventory rises, home values fall.
Agents may keep an eagle eye on all of these macro factors, but real estate investors keep an even closer watch on these numbers because they’re investing cold, hard cash.
That’s why the best agents pay close attention to investor activity, too.
“There are a lot of factors playing into home values that most home sellers don’t even think about, like investor activity,” advises Geraci.
“You don’t see a lot of investors flipping or buying properties right now, because they’re waiting to see what the market’s going to do.”
Just like buyers and their agents, investors are calculating how the economy, interest rates, inventory, and other factors are influencing home values.
Only they take their estimations one step beyond how much a property will cost and run the numbers based on how much income a property will generate—which is known as the income approach.
If an investor can’t make significantly more in rent per month than they’ll pay on a mortgage payment, they won’t buy.
Fewer investors means fewer buyers, higher inventory, and lower home values.
Assessing all of the macro factors that impact home values is valuable, but doing so can only tell you so much about how much your home is worth.
If you need more than a ballpark estimate for your home value, you’ll need to take a closer look at the micro factors that influence house prices on the local level.
Comps are comparable sales (the closed sale price of homes recently sold in your neighborhood), and they serve as the foundation for the unique comparative market analysis (CMA) they’ll create to help determine the right list price.
What do comps have to do with your home’s value?
Products are only worth what consumers are willing to pay for them. That’s why comps focus on sold homes, not the prices set your competition for their currently listed houses.
This is an important distinction. Current list prices only indicate how much your neighbors want for their houses. Sold prices tell you exactly what buyers were recently willing to pay for other homes similar to yours.
Think of it this way: There’s no way to know if your competition’s agents have done the legwork to determine the right list price.
To be considered a viable “comp,” a property must be “comparable” to yours in location, size, age, and condition.
When a home was last sold also plays a role. Ideally, you only want to look at similar homes that have sold in your area within the last six months.
Consider this tale of two houses. Both homes have three bedrooms, two baths, beautifully remodeled kitchens, and big backyards. However, one home is located on a quiet cul-de-sac, while the other is situated on a busy corner and backs onto a freeway.
Which home would you pay more for?
Most buyers are likely to make better offers on the cul-de-sac home—and the more they’re willing to pay, the more it’s worth.
Other factors that make for a “good location” include being located in: a good school district, an area with low crime statistics, or near amenities, like the beach or shopping centers.
The more desirable the location of your home is, the more buyers you’ll have making offers. Offers lead to bidding wars that drive up your home’s value.
“Expert agents know to pull comps from within a one or two-mile radius because that’s the best way to determine how the neighborhood impacts home values,” says Geraci.
So, your agent wants to list your house at $375,000—but you’ve checked out recently sold homes online and found out several neighbors sold at $410,000.
Interest and inventory rates are low, buyer demand is high—what gives?
“Agents look deeper than the location and listing photos to find comps, they’re also looking for similar home features, like the number of rooms, and square footage,” advises Geraci.
It’s not enough that a comp is nearby, it also has to be similar in age, lot size, square footage, number of baths and bedrooms, and even layout.
So, if your neighbor’s house is newer, has a bigger backyard, an extra bedroom, a bonus half-bath, and a trendy open floor plan, it only makes sense that it’s valued higher than your home.
In some cases, two homes that are absolutely identical in age, size, layout, and even location, can have vastly different values—all because of their differing conditions.
Deferred maintenance is one major factor that can drain your home’s value.
Let’s say that you are consistently diligent about completing your home maintenance checklist every year. You have your HVAC seasonally serviced, and have your roof inspected once a year.
As a result, your 15-year-old HVAC is still chugging along, you’ve repaired your roof before it had a chance to leak.
Your neighbors, on the other hand, have deferred their home maintenance, and now both the HVAC and roof need replacing.
Guess whose home is worth more now? Yours.
Any updates and upgrades you make to your home, like installing new appliances in the kitchen or remodeling a bathroom, also serve to improve its condition and its value.
You don’t need to do any major remodeling projects if you invest time and effort into preparing your home to sell.
“How well your home has been prepared to sell impacts its value tremendously, ” advises Geraci.
“Take two homes that are the same age, and in relatively the same condition. If one house doesn’t show well, if it’s cluttered, or hasn’t been freshly painted, that going to bring the value down.”
Most homeowners who are curious about their home’s current value are interested because they’re considering selling and they want to know how much they can get from their equity.
And while all of these previously mentioned macro and micro factors play a big part in determining your home’s value, how much money you make from your home sale often depends on how good your agent is at pricing and presentation.
Get the list price wrong, and you’ll watch your home value slowly sink as you rack up too many days on the market.
And even if you price it right, a poorly presented home will sit on the market for months on end. Remember, a home is only worth what you can get for it, and just like any product, if you don’t package and advertise it properly, you won’t get what it’s worth.
That’s why so many agents recommend having your home professionally staged, especially before any listing photos are taken.
“Staging can really help a home’s value, even if it’s outdated,” advises Geraci.
“I recently had older clients who had a beautiful luxury property valued at over 1 million, but it was a little outdated with pink wallpaper and so on. Instead of replacing it, I had my stager modernize it with pillows and decor throughout the house.”
Settling on the right list price requires both assessing national real estate market trends and knowing what’s going on in your local market.
To get all that, you’ll need the assistance of an agent who’s actively selling homes in your neighborhood.
“Good agents don’t just pull numbers out of their hats when they suggest list prices,” says Geraci. “If you want to maximize the value of your home, you’re going to have to put some work into it. Even just little things as easy as new paint and carpet.”
No matter how highly you value your own home, there’s no guarantee that it’s actually worth as much as you may want for it.
That’s why hiring a great agent who understands how to gather and evaluate all of the hard data is vital if you’re intending to sell. If it’s worth less than you want, you need to be willing to work to increase its value.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
