Home Sales: Price Appreciation Is Leaving Comps and AVMs in the Dust

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Manage episode 291144737 series 2394432
By Kathy Fettke and Real Estate Investing with Kathy Fettke - RealWealth Network. Discovered by Player FM and our community — copyright is owned by the publisher, not Player FM, and audio is streamed directly from their servers. Hit the Subscribe button to track updates in Player FM, or paste the feed URL into other podcast apps.

Home prices have been rising so fast that comps have become wildly unreliable. That’s making it difficult for sellers to set accurate listing prices, and for buyers to get homes appraised for what lenders are willing to loan. Home valuation tools like Zillow’s Zestimate and others are also struggling with a volatile pricing environment, and are often off by an insanely high amount.

In a report by Inman, realtor Tim Collom in Sacramento, California, said that estimated home values by companies like Zillow and Redfin are “always” off, and it’s getting worse. He says: “They’re not off by $10,000. They’re off by like $100,000 to $200,000.” If you go by percentages, he says they can off by as much as 10%, and that even experienced real estate agents are having a difficult time keeping up with the trends in home prices right now.

Tools like the Zestimate are automatic valuation models or AVMs so they rely on software to automatically update figures. There’s been a lot of criticism about these tools, but Zillow defends its algorithm which it says is constantly updated by a team of data scientists. Owners can also input upgrades which may impact the value.

In a statement to Inman, Zillow claims the Zestimate is “incredibly accurate with a mean error rate of 1.9 percent for on-market homes and 7.3 percent for off-market homes.”

Zillow also acknowledges that valuations are more difficult right now because of fast-moving prices. The real estate website says that Zestimates are not appraisals. They are only a starting point for buyers and sellers and suggests working with a local real estate agent to fine tune that figure.

Big Sky, Montana, real estate agent, Michael Pitcairn says the Zestimate has been more than 10% lower than the MLS home value data used by his brokerage. According to Inman, Zillow says Big Sky’s home price appreciation is rising 21% year-over-year. Pitcairn’s MLS tool says it’s more like 35%. That’s also very close to what Realtor.com is estimating, at 34.6%.

But it isn’t just the AVMs that are causing trouble for home valuations. Many real estate professionals say that comps aren’t much help either, especially if there are no very recent sales. That’s making it hard for listing agents as well as appraisers.

Missouri appraiser, Mason Spurgeon, says: “It’s a crazy time right now.” He says that appraisers don’t predict the future. It’s not their job. They look backward in time. They analyze what has already happened in service to the lender.

That can also result in a big gap between the appraised value and the agreed upon sale price which is making it impossible for some buyers to follow through on a deal. If they are relying on a loan and they only have a certain amount of money for a down payment, they won't be able to cover that gap. Sometimes, buyers can provide comps to prove that an appraisal is low, but again, the comps are not keeping up with the price appreciation.

Inman offers a few work-arounds for agents, and basically anyone doing their own legwork on home values.

1 - Expand the geographic area to analyze how the market has been performing. And, look for similar markets just outside that area to find data on pricing.

2 - Expand the square footage of the home to include more comps within a wider range. Or, remove the square footage altogether to get a look at what’s sold and for how much.

3 - Ask agents in the area about how many offers they are getting, how high the offers are going, and pending sale amounts. Some agents may be willing to share that information.

4 - Participate in local online discussion groups where everyone is sharing information.

The take-away -- You have to be more proactive in coming up with a valuation that works within the market, and works best for you.

Check the podcast player page for links at NewsForInvestors.com

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Links:

1 - https://www.inman.com/2021/04/26/inman-handbook-on-comps-in-these-chaotic-times/

2 - https://www.inman.com/2021/04/27/zestimates-cant-keep-up-with-wild-housing-market-agents-say/

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