“My house can’t really be worth that!” – exclamation from a friend
Believe it or not, I steer clear of writing about real estate because there are more things in life than houses. Yet, I’m drawn back to the topic just like I’m drawn back to mentioning MVIS when I’m writing about stocks. This blog is about personal finance; and I had to remind myself that I was writing about personal finance and real estate and estimating the value of my house for years before I even considered becoming a real estate broker. There’s one chart in particular that reaches into both topics, and that comes up in conversations. What’s a person’s house worth? So, building from what I’ve written about before, and adding a bit of what I’ve learned as a real estate broker, here’s some data about how hard or easy it is to estimate a house’s value.
(Apologies to renters, but keep in mind that if you ever want to own, this may be useful.)
If you’re trying to understand your personal finances, it’s important to understand your assets and liabilities. For most people that’s their house and its mortgage. This is something worth doing.
Real estate is weird. Have you noticed that? It’s almost as if it is more art than science. Both are correct. It’s possible to throw math at the problem and crunch through to find an answer that has some mathematical basis as well as plenty of assumptions. Quite objective. Think of it as micro-micro-economics. It’s also important to realize that markets are driven by people deciding to sell and people deciding to buy, which means people are involved. Psychology becomes important, as well as emotions like fear and desire. Quite subjective.
Just about four years ago I wrote about Will Zillow Make Me Move. My finances were struggling, but Seattle’s real estate market was bubbling. Those bubbles were about to surprise many by frothing up into much higher levels, rising over 73% until it recently settled down to ‘only’ being up 71% in that time. It wasn’t dramatically apparent, but Clinton swung up over 66%. Then, I was relieved that if I sold I would at least be debt-free, homeless, but debt-free. Now, if I sold I’d have enough to buy something small or questionable somewhere off the island, probably away from a paycheck, and debt-free. No surprise, my goal is higher: a comfortable and sustainable lifestyle.
The most common resource I’ve seen people use is Zillow’s Zestimate. The most common resource I use now is – me. Hey, it’s my job. Frequently, I get to bridge the gap, if any. I’m a geek. Some may bridge that gap with denial or a bit of arm-waving. I decided to use data, too.
Since September 2018, I’ve usually started my day by checking Zillow, Redfin, and a couple of industry sites for estimates about my house’s estimated value. I won’t walk you through the drama of the daily swings, but just look at that chart. At first it seemed like every estimate was within $20,000. Not bad, considering no art was involved. By the middle of January, the disagreement was over $70,000. That’s a big difference in post-sale lifestyle. Then, Zillow rose up beyond them all, then dropped tens of thousands in a day.
No. My house wasn’t hit by a tornado, earthquake, or volcano overnight. Something in the data or algorithm changed and whomp and whoops, there goes an estimated tens of thousands of dollars in my estimated net worth. Fickle?
Look at the other algorithms. They, too, see swings of tens of thousands of dollars in a day. How does that saying go? “The person with one watch knows what time it is. The person with two watches doesn’t.” Ignorance can be bliss. A bit of extra knowledge can actually be confusing. No wonder people who are proud of having one clear, declarative statement to live by don’t want to hear that someone else has a different clear, declarative statement for them to live by. I’m tracking four estimates and know the only real answer would be how much someone would pay if I put my house up for sale.
Something so important to managing finances as a house’s value in such a money-driven culture means understanding such things, yet there are no perfect tools to apply to the task of estimating a credible number.
The world continues despite imperfections.
Here’s where I should shout-out to my fellow real estate professionals. Real estate brokers and appraisers prepare analyses regularly. Appraisers typically talk with bankers, so they’re more conservative. Real estate brokers typically talk to homeowners, which can mean being conservative in some cases and generous in other cases. Some want to maximize profit while others want to minimize time to sell. The answers can include a bit of the subjective (from “oh the smell” to “look at that view”) as well as the objective (square feet, number of bedrooms, acreage, et al.) That’s also why the estimates can cost more in time and money. It is a hard estimate to ask for on a daily basis.
Fortunately, there are lots of sources to check. I picked Zillow and Redfin out of habit, and because I wrote about them regularly in a previous writing job. In the nature of capitalism and competition, something else out there may be doing a better job.
Each tool is developed by a different team, possibly with different goals in mind. I’m sure they guard their algorithms and assumptions, and change them without warning. That makes them a mystery; but hey, they’re free.
I check daily because clients made me curious, and because I’m a data geek. Whether you’re updating your Big Wall Chart of personal assets, liabilities, income, and expenses; or just trying to get an idea of your net worth; or wondering if you can retire by selling your house; estimating your house’s net worth is a worthy exercise.
There’s also a difference between what we hear on the news, and what such real estate sites tell us. I recently gave a series of talks about real estate and affordability trends on Whidbey Island. Thanks to the Sno-Isle Library system, I’ll be doing so again in the autumn. The talks started with a version of the chart I showed above, the bumpy, fickle, bouncy chart of values for my house. The rest of the talks are smoother, more general, covering larger areas, and longer time spans. They also are based on actual sales, not estimates of would, could, and maybe. The smoother data is what shows up in the news. If the news needs something more dynamic, they can look at smaller datasets or shorter time spans or more particular neighborhoods. Both perspectives are valid, but they were developed for different needs.
The market data shows my hometown (Say Yay for Clinton!) median sales prices are up ~6% since September 2018. Zillow estimates my house as down ~2.6%. Redfin sees my house as up~ 4%. Three watches. Hard to know what time it is.
Can my house really be worth between $342,000 and $372,000, when
“Zillow estimated a low point for my house’s value at $236,000 in October 2014. Whether because the threat of foreclosure is removed, or because Seattle’s market is rising, or because of some fluke in their algorithm, Zillow now shows a Zestimate® of $323,838.” – Will Zillow Make Me Move
For my personal finance purposes, I’ll guess somewhere in the middle because the final decision will be made sometime later probably involving strangers and a market and economy that is only a guess.
If I was to need, not just want, an estimate, I’d use those other tools plus my experience.
If I just wanted to satisfy my curiosity about my house and the market, I’d use a bit of free, quick analyses, plus some general market trends.
Pick the tool that meets your needs.
If you want to know more about real estate trends on Whidbey Island, check out my previous posts based on the talks, including the videos and presentation slides – or call me. Hey, it’s my job, eh?
What’s your house really worth? Let’s find out. I’m curious.