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Why owners often overestimate their home’s market value

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o you know what your house is worth? Would you concede that there’s a chance that your estimate of its value might be higher than what a buyer would pay?

A new statistical study, published in the Journal of Housing Economics, found that homeowners on average “overestimate the value of their properties by about 8%.”

Tapping into federal databases, researchers concluded that over-valuations probably are tied to erroneous owner estimations of the capital gains they’ve accumulated in the house.
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The study is in sync with a monthly survey conducted by Quicken Loans, which compares estimates provided by applicants for refinancings with results from appraisers.

The latest Quicken Loans study found a “widening gap” on average across the country between what owners think their homes are worth and actual market value. The divergence was much narrower in the Quicken survey compared with the Journal of Housing Economics findings — currently just seven-tenths of 1% — though in 2008 it averaged around 7.5%.

Nobody can blame owners for thinking optimistically about their homes’ value, right? It’s human nature.

It’s easy to get emotionally attached to a home and think that it’s worth more than it is, since it has great sentimental value to yourself. That’s why it’s so important to hire an unbiased agent. If you use UpNest, top agents will compete to earn your listing. So not only…
at 1:52 PM June 09, 2015

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But here’s a question I recently put to real estate appraisers in different parts of the country: Other than the obvious emotional attachments that color our perceptions of our homes, where do we tend to err when it comes to estimating value?

Top of the list: unrealistic expectations about how much the improvements you’ve made to the house will add to its resale value.

Because you’ve paid the bills, you know precisely how much you sunk into the kitchen remodeling, bathroom upgrades, landscaping and the new roof. Tom Horn, an appraiser in Birmingham, Ala., says consumers “may think they can get back what they put into” the improvements they’ve made over the years. “But it doesn’t work that way.”

Annual real estate surveys consistently show that dollar-for-dollar returns are rarely the case.

The 2015 “Cost-vs.-Value” study by Remodeling Magazine and members of the National Assn. of Realtors in 102 markets found that many high-ticket improvements don’t come close to paying off what they cost.

For example, based on national averages, a major kitchen remodeling costing nearly $57,000 would return just 67.8% in resale value. A backup power generator returned just 59.9% and a home office remodeling less than half, 48.7%.

A closely related issue: over-improvements of your home compared with the neighborhood norm.

Don Boucher, an appraiser in the Washington, D.C., area, says he sees it all the time: Owners sink tens of thousands of dollars into a super-premium gourmet kitchen in a neighborhood where nobody else has installed such luxury.

When you renovate a kitchen or other feature of your house to a level typically seen only in communities where homes cost double what they do in yours, you’re not going to recoup that extra expense, Boucher says.

Another example of where owners get off track, according to appraisers: They install highly personal but costly items — features that they love passionately or need, but most potential buyers don’t.

Say you spend thousands of dollars to install an elaborate indoor lap pool or spa. It may be just what the doctor ordered for your health, but prospective buyers may not want it.

They may even plan to remove it if they purchase, giving you zero in added value in their offer. Ditto for expensive, special-taste items such as all-glass conservatory rooms, over-the-top backyard “environments” and, in some northern markets, swimming pools.

Gary Crabtree, an appraiser in Bakersfield, says lush landscaping that requires large amounts of water isn’t adding as much to value as it previously did, given the current severe drought conditions and water restrictions in California.

Finally, appraisers say owners may not understand the valuation dynamics of their local market.

Glen Kangas, a Los Angeles appraiser, says owners frequently estimate value based on the square footage of the house. Yet “in my area, land value is really high,” he said. “So sales with larger lots have a higher price per square foot,” which owners of below-average-sized lots erroneously apply to their own home values.

Bottom line: Without access to key data — recent sales comparables, accurate information on appreciation rates over time — it’s tough to know exactly what your house is worth.

If you really want to know, consider hiring an appraiser to perform an independent valuation — they work for owners, not just lenders — or talk to multiple realty agents who specialize in your neighborhood.

Everything Is (Still) Up: Home Prices, New-Home Sales, Consumer Confidence

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Three big sources of data hit the stands on Tuesday, confirming what most of us already know: Prices are going up, sales are strong, and demand is stronger than supply.

The bottom line of the latest S&P/Case-Shiller Home Price Index: Home prices were up 4.1% this March from last (a more typical rise is 1%). From the U.S. Census comes this (non)surprise: New-home sales were up 6.8% from March. The one tidbit of shift is that consumer confidence, which sagged in April, was peppy again in May: 95.4 from 94.3. Spring is in the air, and Americans are in the mood to buy.

More houses, yep, but still not enough to shift the supply-demand ratio, so expect more of this news: Home prices are likely going to climb for a while more, at least until new construction can alleviate some of the pent-up demand. The median price of new houses sold in April 2015 was $297,300; the average sale price was $341,500. Those prices are much higher, and soaring faster—a hike of 10.3% year over year—in San Francisco. While that’s no surprise, either, prices in Denver rose 10%, and 9.3% in Dallas. Here’s the breakdown of the 20 cities that make up the Case-Shiller Index:
City Monthly gain Yearly gain
Atlanta 0.8% 5.4%
Boston 0.4% 4.6%
Charlotte 0.9% 5.8%
Chicago 0.9% 3.4%
Cleveland 0.4% 1.0%
Dallas 1.8% 9.3%
Denver 1.4% 10.0%
Detroit 0.8% 4.2%
Las Vegas 1.1% 5.7%
Los Angeles 0.8% 5.5%
Miami 1.0% 8.7%
Minneapolis 0.9% 3.0%
New York -0.1% 2.7%
Phoenix 0.6% 3.1%
Portland 1.1% 6.9%
San Diego 1.3% 4.8%
San Francisco 3.0% 10.3%
Seattle 2.3% 7.5%
Tampa 1.4% 8.1%
Washington 0.8% 1.0%
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But fear not—we’re not repeating the mistakes that led to the housing crisis of 2008 (though, maybe we’re making some new ones). As we noted last month, this news does not a bubble make—the inflation isn’t based on speculation or the granting of mortgages to folks who can’t pay them. Banks are far more cautious with their lending now, which is good news for them, and perhaps for the economy in general, but bad news for those who don’t have the capital or credit but are capable of making monthly payments anyway.

“People now make a habit of calling a bubble when prices go up faster than ‘normal,’” says our chief economist, Jonathan Smoke. “But sometimes price increases are just simple reflection of market dynamics.”