Given the market intensity of this year, it seems like a good time to talk about market value and how it is determined.
Let’s start with a quick exercise. If we asked you what the price per cart was at Costco, could you answer the question? Would $500 per cart be a deal or a rip off? You might say it depends on what is in the cart. Is the cart filled with meat or macaroni? Wine or grapes? Televisions or tortillas?
During March of 2020, a cart full of toilet paper might have been worth more than a cart full of movie tickets. We all know the price of anything is dependent not only on the item itself, but also on the perception of the value of that item in the marketplace — which is determined by supply, demand, mood, and motivation.
When Zillow started with property valuations years ago, we saw that their values were wildly inaccurate — two identical houses next door to one another could be hundreds of thousands of dollars apart in price. In fact, in 2016, it was no surprise when Zillow CEO Spencer Rascoff sold his own home for 40 percent less than the Zestimate.
Today, Zillow reports that 99 percent of their Zestimates are within 20 percent of the sales price. Sounds pretty good, right? Let’s break that down for a moment — on a $500,000 property that is a range of $100k on either side. In all our years in the business, we have yet to meet a buyer or seller who is good with that spread.
Value is based on the eye of the beholder, and, over the past few years, everyone has used Zillow so frequently that they started to believe what they saw on the screen. We, the viewers — who found Zillow particularly addictive in an increasing market — gave Zillow credibility through our clicks and views.
Many homeowners trusted the Zillow values so much that they sold their homes to iBuyers and investors based on a Zestimate, leaving enormous amounts of money on the table in the hottest market of all time. No appraisals were conducted so there were no checks or balances. The investors knew sellers would believe Zillow and so they structured their offers accordingly and made a nice profit along the way.
Real estate is a business of nuances. Selling a house is not like selling anything else. Many people think value is only based on the obvious factors: location, number of bedrooms, square footage, garage size, etc. But value is also based on a huge number of less quantifiable factors that can positively or negatively impact the price of a home, including compass orientation, cabinet color, proximity to a freeway, condition of the neighbor’s house, cleanliness, a political sign in the front yard, light fixtures, pet friendliness, baseboard size, smell, neighborhood amenities, Instagrammable vignettes, or simply the feeling. Buyers will buy or reject a property based on these factors alone.
The other great nuance is the state of the market. How many buyers are looking on a given week and how motivated are they? Did interest rates increase or decrease? Was the home overpriced or underpriced to start? How many other comparable homes are on the market?
And what about the personal state of the buyer or seller? Do they have to sell? Are they being transferred? Are they getting married or getting divorced? Are finances motivating a purchase or sale? These factors can all impact price to varying degrees.
Market value also depends on national trends and confidence. In 2019, no one wanted a home office, home gym, or home theater. By the middle of 2020, buyers wanted two home offices, room for a Peloton, and a second family room for their kids. Homes that had those features received a premium, but maybe in a year or two they won’t any longer.
Similarly, chatter about an impending housing and/ or stock market crash impacts confidence and market strength, independent of actual market conditions. National elections, state laws, tax codes, gas prices, weather, forest fires, job opportunities, and politics can all impact value.
So, given all these nuances, there is no way a Zestimate will ever be right.
Our family has been representing buyers, sellers, and investors for over 40 years. Every day we analyze the many nuances of real estate, talk to buyers, talk to sellers, talk to other Realtors, measure market conditions, see inventory, sense trends, compare market cycles, read articles, evaluate broader economic conditions and, of course, analyze relevant data to help our clients find opportunities in the marketplace. In our business, it’s an art and not an algorithm.
Wishing you and your families a very Happy Holiday season and a healthy and happy New Year!
John and Natascha Karadsheh are co-owners of KOR Properties, a boutique real estate brokerage serving the Valley of the Sun, and the creators and founding sponsors of Mesa Food Truck Fridays. John has been a Multi-Million Dollar producing agent for over 19 years and is an Accredited Buyers Representative (ABR) and Certified Residential Specialist (CRS), a member of the Arizona Regional MLS Rules & Policies Committee & Appeals Committee, and the West and Southeast Realtors of the Valley Professional Standards Committee.
Natascha is an Associate Broker, a Multi-Million Dollar Producer, Founder of Mesa Food Truck Fridays, Member and Past-Chair of the City of Mesa Economic Development Advisory Board, and serves on the Board of Directors of the Greater Phoenix Economic Council.
You can reach John at (602) 615-0843 and Natascha at (602) 909-4995, or visit their website: KORProperties.com.