Estimating a home’s value — both as a whole and for individual homes — is a notoriously complex process. This is because homes are durable, complex commodities, and each home is unique in its location, features, or both. What’s more, the homes are under-traded, meaning very few of them are traded in a given year. This makes finding comparable good home sales difficult, or even impossible, in some markets.
As a result, complex measures of aggregate and individual home values have emerged to account for these difficulties. These include repeat sales and median home value indexes, as well as home value estimates for individual homes.
This is not normal
In normal times, generating accurate home price indexes and individual home values is challenging enough. Add to that the unprecedented features of a housing market distorted by the pandemic, and the home valuation landscape has only become much more complex over the past 18 months. These variations include:
- Housing inventories hit a record low: Sellers’ fear of having sick strangers in their homes led to a rapid drop in the number of homes on the market, and this drop was a catalyst in creating a the downward spiral of inventory. This also discourages future sellers from listing as they will then need to buy another home as well, thereby exacerbating the inventory problem. As a result, inventories fell to record lows in January and February 2021, according to the National Association of Realtors.
- Price growth is accelerating to record highs: The desire to buy homes with offices, close to natural amenities and in less expensive areas has fueled a massive surge in new and transforming demand in the housing market. Low mortgage rates also entice marginal buyers to move from renting to owning. The end result is biggest house price increase was recorded in U.S. history at 19.7% year-over-year in July 2021, according to the S&P/CoreLogic/Case-Shiller Index.
- Home repair activities hit a record: Due to higher prices and lower inventory, many existing homeowners have decided to renovate their homes as an alternative to selling and trading. This is reflected in the aggregate measures of the spike in home renovation costs during the pandemic. Inflation-adjusted expenditures rose to $312 billion in the first quarter of 2021, the third-highest amount on record, according to Harvard Joint Center for Housing Studies, sits just below the fourth quarter of 2006 and the first quarter of 2007.
How have these distortions influenced the context of measuring family values?
First, list-based home value indexes will use a much smaller number of listings, which can lead to volatility in those metrics.
Second, a rapid increase in home values (or deceleration, for that matter) means that measures based on home sales slow down because inputs can be slow to pick up an inflection point in the market. However, these are only likely to affect small area measures of home value first, as the sample size at the country level is probably still large enough to be unaffected by volatility and lag. of the local area in the home sales report.
The third, and most severe impact, is that rising U.S. home improvement spending can skew our metrics and home value estimates. This is because all of the popularly repeated home price indices assume that little or no work is done on a home between sales and thus attribute 100% of the variation in sales. The value is purely due to market conditions.
While some individual estimates use listing descriptions of listed homes to guess the home’s condition, a very small portion of the housing stock is listed every year. A small enough share that in fact, most individual home value estimates also don’t take into account changing property conditions.
The implication is that current home price indexes may overestimate home price growth because some of the increases in value actually come from capital improvements and not from the bull market, while models Current valuation models may underestimate the value of off-market homes because they do not incorporate information about renovation activity. These biases open up a context ripe for improving home value indexes and spatial estimates.
Ralph McLaughlin is chief economist at Kukun, an AI-powered real estate technology platform for real estate owners and investors that provides access to home data and analytics.
https://www.marketwatch.com/story/how-the-pandemic-broke-the-yardstick-for-measuring-home-values-11637258564?rss=1&siteid=rss Opinion: How the pandemic has disrupted the yardstick for measuring home values