Let’s face it, home values over the twelve-year period from 2010 to 2022 have been pretty wild. Low interest rates allowed buyers to secure larger mortgages, which allowed for higher priced offers. When the pandemic arrived and sharply restricted supply of available homes and shifted family priorities, home prices skyrocketed. In certain regions, prices escalated quickly and sellers couldn’t believe their luck — or in some cases, sellers regretted selling as prices rose another 5% the next month.
In 2023, how should one think about pricing a home? Fundamentally the method hasn’t changed, with a few caveats. Sites like Zillow, Redfin, and Trulia base their values on many factors; but the primary method they apply, along with real estate agents, is “comps,” or comparables. Comps are simply other homes that have already sold. The best homes to use as comps are are nearby, recent, and have similar characteristics to the home being valued. And this process can be more art than science.
Along with negotiation, logistics, contracts, and sound real estate advice, assisting with the appropriate pricing of a home is one of a real estate agent’s primary responsibilities, and one of the primary tasks you are paying for. The best agents are the ones who understand today’s market conditions so as to maximize price and minimize time on market.
When the market conditions change rapidly, recent sales become less useful for comparable pricing. Why? Let’s take a look at an example, from a buyer’s perspective.
Did this example home’s actual value drop by $315,000 over 3 years? Of course not, but that’s how we’ve been taught to think about “home prices.” A more realistic way to think about home prices is not the total mortgage value (which obfuscates the interest rate) but in the typical monthly mortgage payment, given the current interest rate. Obviously, cash buyers who don’t need a loan should think about the overall home price, but most of us buy home through mortgage loans. Agents who incorporate this monthly mortgage payment thinking into their comp price modeling will adapt more quickly to these changing conditions of the market. It’s easy to say high interest rates are the cause of this scenario, but low interest rates were just as much to blame.
Will the current higher interest rates will cause a real estate crash in 2023? It will have a stagnating effect, and is putting the brakes on the upward price movement we’ve seen over the last decade. But low interest rates have a ratcheting effect. The family in the example above cannot simply sell their home for less than they owe on the mortgage, so “banking physics” says that the home price can’t drop by more than they’ve put in (the $50k down payment). They will need to stay put in this home for some time, and therefore can’t realistically take that job in another town. As long as their current mortgage is affordable at their original interest rate of 2%, they can stay, or possibly move and rent it out. But home prices don’t simply drop because new mortgage rates are high. A real estate crash could manifest if a large number of homeowners were to fail to make payments due to job loss or adjustable rates on mortgages; however, unemployment remains extremely low (even with a large number of layoffs) and adjustable rate mortgages aren’t commonplace.
To price a home in 2023, you will need to more weight on recent sales and consider interest rates at the time of the sale. You will need to understand the specific mix of cash buyers, buyers with larger down payments via current home sales, and first-time buyers with minimal down payments. You might need to have sobering conversations about the equity you thought you had a year ago. These are all reasons why you need a smart, savvy, experienced real estate agent in 2023.
