If you’ve never thought much about the logic behind the value of real estate, you might assume prices are just made up on the spot.
Hey, we get it. You’re skeptical.
After all, why should a three bedroom house in L.A. cost hundreds of thousands more than a similar three bedroom in Nashville?
It can be really disorienting to start comparing homes and realize that they have widely different price tags. But there’s generally some method to the madness.
In fact, a good bit of research and statistics that go into determining what the worth of a home is. Both independent research organizations and government agencies track tons of data about the real estate market. Where homes are selling, what kinds of homes are selling, and what people across the country are paying for property.
In short, all that research comes down to one truth: all real estate is local.
All Real Estate Is LocalSo much of what determines the worth of a home has to do with the location of that home.
The U.S. is a big country with hundreds of major cities and thousands of small towns, each unique in its own way. What’s going on at the local level often determines what a home is worth.
Local Supply and DemandOne of the biggest factors driving the price of homes in a particular area is the basic economic law of supply and demand — how many homes are up for sale and how many people want to buy a home in that area.
When there are plenty of homes on the market but not as many people want to buy, the prices of those homes fall. Demand is below supply.
The opposite happens to prices when an area is very desirable but there aren’t many homes up for sale.
Local PerksPrices can also be affected by neighborhood perks. A home near a nice park, trendy retail area or restaurants, or other feature can be worth more than a similar home that’s further away.
School districts can have a pretty sizable effect on value, too. Even if you don’t have kids and don’t plan to, buying a house in the top local school district means a higher price tag. Homes in a top school district can even hold their value better in an economic downturn.
Local Comparable SalesSales of comparable homes in the same or a similar neighborhood can also influence the value of a home. In a neighborhood where several houses have sold for more than their asking price, a similar home might be able to command a similarly up-sized price.
Unfortunately, the same factor can work also against you. If you’re selling a house after several similar, nearby homes sold for cheap, you may end up with lower bids.
Other Real Estate Value FactorsOf course local conditions aren’t the only thing affecting home prices. Other details can push a particular home’s price higher or lower.
A home with unusual features or a unique history might sell for a higher price. A home that would make a good investment or that has good renovation potential might sell for more.
Sometimes economic factors can affect home prices as well. High interest rates, a weak job sector, or tighter requirements for borrowers could all affect the supply and demand for housing, which could temporarily send prices higher or lower depending on the situation.
How Homes Get Price TagsSo what decides how all these perks and data add up to a price tag for a particular home? That’s generally the job of appraisers. Appraisers consider all the data, all the records, all the local perks and come up with a number.
You’ll get the full experience of a home appraisal when you choose what home to buy — a lender will require one to make sure the loan they give you isn’t worth more than your new home.