Real Estate Economy: What Determines House Prices?
Homebuyers and sellers have widely different priorities. But the two parties in any home sale are equally and vitally interested in the home’s price.
And prices in Raleigh, N.C. market are among some of the most affordable in the nation.
However. prices in the area have been on the rise and are projected to rises in the years to come. Zillow.com shows that house prices have increased by about 6 percent in the last year to about $278,000 in the last year. But that of increase is set to slow down to 3 in the next year or so.
But what’s behind these prices? What factors influence a home’s sale price?
The TL:DR answer: a lot. But for those who care about their next real estate move, understanding the invisible forces at play that push prices up or down is vital.
Let’s run through the most important factors.
House Prices and the Free Market
No single authority sets the price of a home in most private sales in the U.S. All prices are negotiated between buyers and sellers within the environment that the sale takes place.
But in principle, prices of homes go up or down according to the same forces that influence good generally, supply and demand. And this is normally true regardless of location.
When there is a surplus of a thing, more than needed to meet demand, prices usually dwindle. If there is a shortage, not enough to meet demand, then prices tend to increase.
But when demand is low, prices will always fall to meet the demand. Similarly, when the supply is low, prices jump.
Regardless of the economics, the price of a home is somewhere between the lows that buyers are willing to pay and the highs that sellers feel like they can set.
Another complicating point comes in with financial institutions’ standards for what they are will to pay for a home. Combined with working with real estate agents, homeowners have little control over the final price of their homes compared to working with cash buyers.
Location, Location, Location
Homes can’t easily move. What is around the home now is what is likely to be around the home in the future.
Buyers will visualize their lives in a home before they consider buying it. Savvy buyers realize that their life will be impacted by the home as well as the things that are nearby or are far away.
So, things such as nice parks, goods schools, proximity to employment hubs, nice surrounding properties all push a price up.
The opposite is true. Buyers are likely to avoid homes in poorly maintained neighborhoods or inconvenient locations.
Buyer’s v. Seller’s Market
This is the supply-demand conversation articulated from the viewpoint of real estate at a local level at a given time.
In markets were a lot of people are selling their homes but few people are buying, housing prices tend to be lower than they normally would be. This is considered a buyer’s market, or a market that is slanted in the favor of buyers.
In these times, buyers have the picks of the homes they want at the prices they want.
The seller’s market is one where the supply of homes for sale is low and the demand for homes is high. This drives house prices up, up and up. It’s good to be selling, not so good to buy.
These local factors often force financial institutions to accept prices at their highs or lows since these factors are set by the market. Regardless of the market, cash offers for homes remain a constant way around the more frustrating parts of each of these markets and are simpler than financing.
The Condition of the Home
Perceived value is most obviously impacted by the state of the home. If a home looks nice and appears to be in good condition, prices tend to increase. The inverse is true; shoddy homes have lower prices.
Assessing the value of a home based on its condition is a dedicated professional field. Banks will often hire professional assessor to try to be objective observers of the true state of a home.
While there are clear factors to consider when looking at a home, such as its age and materials used in the home, giving them value is subjective.
This subjective measure will often set strict limits on the kind of financing banks will provide buyers. That assessment will often determine whether or not the bank will facilitate a sale at all.
Cash buyers and real estate investors will look at the prices of a home for what the home could be.
It’s vain and petty but very real. If a home is ugly, people won’t value it. Simultaneously, pretty homes that have lower objective value will get have a higher perceived value because the perceived need to improve a property is lower.
This applies largely to the exterior aesthetic. Homes with faded paint, overgrown yards and flower beds or cracked paved surfaces all miss points from a visual perspective.
Pretty homes are also easier to sell and easier to attract potential buyers attention.
People often set price negotiations based on the actual sale price of similar homes or comparables. The “comps” for a home will have some practical differences that out to be minor such as the style, size and age of the home. What can vary widely and will be a point of dispute as to the relevance of the comparable will be the layout of the home, its location, whether or not the home is up to current styles or building codes and so on.
Both buyers and sellers have to make the case for why the price should be higher or lower than what other homes have sold for that are basically similar to the home in question.
Home prices will often differ from the comparables in the end simply because there are so many factors in pricing a home.
Cash Buyers Simplify Sales
Selling a home is difficult. Homes are major investments. And it’s not an over-exaggeration to say that home sales and house prices have life-altering implications. One of the best ways to cut through the stress and minutia is to sell directly to an investor who will pay cash for a home.