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General News

Appraising in 2021

January 15, 2021 by Shauna Hatch Leave a Comment

Appraising in 2021!
Sold! It’s a seller’s market!

Appraising in 2021. How will it fare? Everyone agrees that 2020 was a highly unusual year in many ways. The real estate market defied expectations and flourished when many other industries struggled.

Many industry cohorts wonder if housing sales and refinancing will continue to surprise this year! We wonder, will appraisers stay as busy as ever?

While we have no crystal ball, we will examine 2020’s real estate and make a foray into predicting what 2021 will do. Will appraising in 2021 be better or worse than in 2020?

National Housing Prices in 2020

Appraising in 2021 might go up!
Housing prices in 2020 skyrocketed

According to Realtor.com, the median listing price of homes in the United States grew 13.3% in 2020. And according to the National Association of Realtors, the median existing-home price for all housing types in November 2020 was $310,800. This is a 14.6% jump from the year before.

Despite the rise in prices, home sales hit a 15-year high in November of 6.69 million units for existing home sales. New homes hit 841,000 units in the same month. With all of this selling going on, appraising in 2021 will stay strong!

Is this rate of selling sustainable for 2021? As the median existing-home price rises, more and more families in America are finding it difficult to own a home. According to a new report from property data firm Attom Data Solutions, owning a home was affordable (where housing costs exceeded 28% of the average household’s income) for only 41% of the counties nationwide as of the fourth quarter of 2020.

The question that more and more Americans are asking is, “Can I own my own home in 2021?” And the question that appraisers are asking is, “Will appraisers stay busy?”

Why Did Prices Rise So Much So Fast?

Will prices continue to rise?
Why did prices rise?

The record-breaking lows of the average fixed mortgage rate triggered a rush on refinances. It also triggered a rush on the limited number of homes which were available. With historically low interest rates and heavy competition for the homes, housing prices rose quickly. Many first-time buyers were pushed out of the market and many current owners contentedly hunkered down and watched the equity in their homes grow.

Not only did the historically low interest rates contribute to the rise in home prices, but new home construction didn’t keep up. According to research by Freddie Mac, as we entered the 2020 pandemic, the housing supply was short by 2.5 million units.

There are fewer homes for sale today than there have been in the United States during the last 40 years! This, combined with the low interest rates and the unwillingness of homeowners to sell during a pandemic, caused the jump in housing prices. The increase in home prices is a boon to real estate professionals and home sellers, but a bane to buyers.

As we all know, the root cause of these price-raising factors was Covid-19. We’ve all been inundated with analysis and opinions on this historical pandemic. It’s clear that the lockdowns and fear over contracting the virus were the impetus for the lower mortgage rates.

What About Housing Prices in 2021?

Housing Supply

Houses will sell quickly in 2021!
Houses will sell quickly in 2021

A couple of promising signs show that real estate supply will increase in 2021. However, will those increases be enough to slow down the rise in home prices? First-time home buyers are priced out of the market. Also, many current home owners don’t want the higher payments that come with upgrading.

Sam Khater, Freddie Mac’s chief economist said:

“The forces behind the drop in rates have been shifting over the last few months and rates are poised to rise modestly this year. The combination of rising mortgage rates and increasing home prices will accelerate the decline in affordability and further squeeze potential homebuyers during the spring home sales season.

This isn’t hopeful for newbies or homeowners looking to upgrade.

New Home Construction

As the home construction market begins to pick up speed, the influx of new homes will gradually ease the housing shortage. However, this won’t be anytime soon!

New-home construction is expected to increase in 2021, biting into the deficit of available homes. The Mortgage Bankers Association (MBA) forecasts the supply of single-family housing to be around 1.134 million in 2021, 1.165 million in 2022, and 1.210 million in 2023!

“Builders are going to be really busy (in 2021). There’s a renewed interest in housing after (people have been) crammed into a small apartment or house during Covid lockdowns,” says Danushka​ Nanayakkara‑Skillington, associate vice president, forecasting and analysis, at the National Association of Home Builders (NAHB). “Now, more than ever, people want more space. New construction on single-family homes could exceed 1 million (in 2021).”

This much-needed increase in building is hopeful, but it’s not enough. Restrictions on home-building supplies, including heavy tariffs on lumber, need lifted to ease the cost of building homes.

Without a sea change from the government and the construction industry itself, inventory will remain below needed levels.

Robert Dietz, senior vice president and chief economist at the National Association of Homebuilders.

The increase in construction will not be substantial enough to make a significant impact on the housing crunch in 2021. Even with governmental regulation change, the needed help won’t be soon. It remains to be seen if we’re moving in the right direction.

Covid-19 Vaccine to the Rescue!

Covid19 vaccine to the rescue!
Covid-19 vaccine to the rescue!

The pool of available homes will increase as homeowners find confidence from the results of the new Covid vaccines. As Covid diminishes with widespread vaccination, more homes will appear on the market. Let’s hope and pray that the vaccines are effective and long-lasting.

These signs are hopeful, although they certainly won’t catch the market up to current demand in a year’s time. The hope is that housing supply will eventually meet demand in the next few years. This balance will steady the upward climb of home prices and will make homes more affordable for first-time buyers.

Interest Rates

Interest rates will stay low in 2021.
Interest Rates Are At Historic Lows!

What about interest rates? Fannie Mae predicts a 2.8% rate across the entire year while realtor.com predicts an average of 3.2% throughout the year and 3.4% by the end of the year. These rates will continue to push the refinance rush (nearly 2 million in just the third quarter of 2020). The rates will also ameliorate the effects of the high housing prices.

When all is said and done, home prices are expected to rise in 2021, but not at the rate that they did in 2020! Freddie Mac predicts that prices will rise 2.6%, a much lower stretch than 5.5% in 2020!

Appraising in 2021

businesswoman
Appraisers will stay busy in 2021!

It is an obvious prediction that appraisers will stay busy in 2021. It’s also pretty clear that appraising in 2021 will be secure.

While some appraisals have been adapted to the pandemic (hybrid and desktop appraisals), appraisers kept their routine methods (albeit with masks and hand sanitizer) and remained busier than ever.

The possibility of an increase in foreclosure appraisals looms for 2021. Along with the low interest rates, low inventory, and Covid vaccine, this adds security to the appraisal load.

With the Federal Housing Finance Agency looking to overhaul the appraisal processes, appraisers face another year where regulations might change. However, work will stay robust and schedules will stay full for appraisers. For most appraisers, it will be business, very busy business, as usual in 2021!

Get More Information for Your Reports

Try DataMaster

Filed Under: Appraisal Business, appraiser information, General News, In The News, News

Save Time Four Ways!

January 12, 2021 by Shauna Hatch Leave a Comment

Use the right tools!
Save Time With the Right Tools!

Time-Saving Tools

“The bad news is time flies. The good news is you’re the pilot.”

Michael Altshuler

Time does fly! The older we get, the more we realize that! As we come to value our time more and more, most of us are on the lookout for ways to save time. It’s a great feeling when we finally lock in an effective time-management method!

If you’re trying to get more out of your time this year and if you plan to implement new appraisal-help tools, look no further! We’ve got four tools for you that will save you time!

Pssst! At the end of this post, there’s also a bonus list of 21 more tools that will save you even more time!

Plat Maps Saves Time!

Get Plat Maps conveniently through DataMaster!
Plat Maps through DataMaster Save Time!

Save time by accessing your plat maps through DataMaster. (This option isn’t available in other appraisal data management software!) You don’t have to use a separate subscription or gasp…run down to the county office! Just a couple of clicks and the plat map is saved to your digital work file! It doesn’t get any faster than that! How much time will that save you?

CompTracker Saves You Time!

CompTracker is a robust appraisal tool!
CompTracker Saves Time!

How much time do you spend making sure that you’re consistent with comparables that you used in the past? Here’s another area where you can save some time. With CompTracker, you’ll be reminded that you already used the comp! The previous ratings that you gave to the comp will be easily accessible too! No more searching for the comp and its previous ratings!

“(With CompTracker) if I’ve used that comparable before, and I sent it to a client and I said that it was a C4 and Q3, then I’m going to do that again the next time and I don’t have to research that comparable again. All my information comes in. I don’t have to reverify it.”

Jared Preisler

How much time do you spend ensuring that your files are USPAP compliant? CompTracker alerts you to any discrepancies in your current report’s comps compared to your previous uses of the same comps. Even down to a missing comma! By creating USPAP compliant files, you’ll find that revision requests will drop as well!

One more thing, do you spend time maintaining your own database of comps? CompTracker saves your comps into your own database! If Fannie and Freddie have databases of your comps, it stands to reason that you should too!

You’ll save about 15 minutes a report just using CompTracker, not counting the time you’ll save on addressing fewer revision requests.

Smart Field Technology Saves Time!

Smart Field Technology is an appraiser's dream!
Save Time With Smart Field Technology!

Save time by merging data into your reports how and where you want it with Smart Field Technology! With our exclusive Smart Field Technology, we can automatically pull data from your selected properties and into your data summaries. You get instant access to more than 90 built-in smart tags with DataMaster.

You can also easily create your own smart tags! Imagine the time you’ll save over this year (and next year and the year after that…) as you utilize your customized smart tags instead of retyping data over and over and over…

Neighborhood Analysis Saves You Time!

Neighborhood Analysis is a must have!
Neighborhood Analysis Saves You Time!

If you want the flexibility of mimicking whatever the market is, then you want Neighborhood Analysis! After you specify the two markets that you want to compare, DataMaster conveniently presents the comparison for you with easy-to-read charts and graphs! DataMaster’s Neighborhood Analysis displays multiple years of data. And you can view monthly comparisons or quarterly for up to 6 years.

You compare the information, and with DataMaster’s help, analyze the data. One quick note, you can import all of the data that you need, there’s no limit!

How does this save you time? Neighborhood Analysis gives helps you create robust workfiles, so you get fewer revision calls! It’s simple: create a better file and save time on those money-sucking revisions!

Go Faster With DataMaster!

Run Faster!
Go Faster With DataMaster!

“The extra time that I’m not spending typing, I can do research and find the things that might be hidden in a photo, or in an agent comment, or somewhere else. I spend my time where I should be spending it, as the appraiser, not data entry, where DM can do that for me.”

Jared Preisler

So if your 2021 New Year’s goal is to save time, we’re here to help you with that! We’re not done yet though, here are those 21 extra time-savers we promised you!

  • Back-end MLS Data
  • MLS sheet
  • Accesses public records
  • MLS interior and exterior photos
  • Field customization
  • Sales deed history
  • 1004c (manufactured home form)
  • Office workfile sharing
  • Comparables maps
  • comparables info
  • Graphs (16 in Classic, 28 in Pro!)
  • Property Search
  • Subject property info
  • Work file enhancement
  • Compatible with all form vendors
  • Looks like your form software pages
  • Market conditions summary
  • Geocoded distances
  • Easy to add second sale verification source
  • Agent comments on comps in four different places
  • Defensible work files saved for you!
  • Saves one to two hours per appraisal! Most appraisers spend 7-15 minutes in DataMaster!

What Are You Going To Do With That Time?

Relaxing on the Beach!
Save Time And Do More….

Most of appraisers who use DataMaster find that they can do 2-3 additional reports a week. How much more money is that in your checking account? Is it worth $89 a month to you to save time for other things OR to do more work in the same time?

Sounds like a great 2021 goal!

Want to know more?

Give us a call at 801.657.5769 or go to datamasterusa.com!

We’re on Youtube too!

Filed Under: DataMaster Software, General News

Appraising and Foreclosures in 2021

December 16, 2020 by Shauna Hatch Leave a Comment

2021 at the start
As 2021 starts off new, be prepared to shift your appraisal focus

As an appraiser, are you ready to shift your business focus in 2021? While 2020 drove refinances by the truckloads, 2021 is likely to shift to an increased number of foreclosure appraisals.

Unemployment

A closed sign on a business
Unemployment will likely worsen before it gets better

Unemployment will likely worsen before it gets better. As a result, businesses continue to react to the consequences of Covid-related shutdowns and travel restrictions. Due to Covid, employment for millions of Americans will continue to change.

Data Peterson, chief economist for the Real Estate Forecast Summit Conference Board stated, “We won’t see the labor market go back to the 3.4% unemployment we had before the pandemic. It’ll probably level out around 5%. In normal times, that would be good. But based on how far we got in lowering the unemployment rate, that’s still quite elevated.”

The effects of rising unemployment will continue to domino throughout the economy. Unless legislation is signed that will extend the protections afforded underneath the CARES Act, by March of 2021, borrowers who signed up at the beginning of the program in March 2020 will be facing foreclosure. The expiration of the CARES Act will set off a mass exodus from homes. This exodus will flood the market with homes for sale. It will also curtail the availability of rentals.

Evictions & Foreclosures

To make the situation worse, the expiration of the ban on evictions that the Centers for Disease Control and Prevention decreed through December 2020 will increase the migration of homeowners and renters. Unemployment benefits are also nearing their expiration date. Unless legislation extends unemployment benefits, the situation will be even worse.

According to a survey conducted by the U.S. Census Bureau and completed on November 9, 2020, approximately 5.8 million adults say that they are somewhat to very likely to face eviction or foreclosure within the next two months. There are 17.8 million adults that live in households that are behind on rent or mortgage payments. That means that one third of these adults are facing eviction or foreclosure in the immediate future.

Ready, get set, go! Appraising foreclosures will grow in 2021!
The percentage of adults living in households not current on rent or mortgage where eviction or foreclosure in the next two months is either very likely or somewhat likely.

Shift Your Focus

The year 2021 is impossible to predict. However, as you can see, the signs indicate that there will be an increased number of foreclosure appraisals. Appraisers might need to shift their business focus to more foreclosure appraisals in 2021.

It is likely that refinancing will continue through 2021. Many homeowners have yet to take advantage of historically low interest rates. Refinances have slowed down in the last couple months of 2020 though. Keep up on the current trends and be prepared to make the shift in your appraisal focus as the market reacts to the consequences of Covid-19!

Looking for ideas on how to gain new clients? Check out our post: How to Make More Money as an Appraiser: Obtain New Clients.

Filed Under: Appraisal Business, appraiser information, General News, In The News, News, Uncategorized

Should You Upgrade Your Home?

July 2, 2020 by Shauna Hatch Leave a Comment

Should you upgrade your home?
Should you upgrade your home?

Why This is For Appraisers Too

If you saw part A of this blog post, Upgrades, Is It Worth Keeping Up With the Jones, you’ll remember that I promised a part B! This post focuses on whether or not a homeowner should make upgrades, and if so, which upgrades should they make? So you might ask what this has to do with appraisers? You can share this post with your clients if they have questions that are covered below! So whether you’re a homeowner or an appraiser (or both!) this article is for you!

Selling your home?
Thinking about selling your home?

Thinking About Selling?

So you’re thinking about selling your house. It’s a big investment, and you want to get the most ROI (return on investment) out of the sale. How do you make sure that your house gets the highest selling price possible with the least amount of output from you? There are several factors to consider, including the state of the market, how your home compares to its competitors, and if the improvement has a history of providing an ROI of 100% or higher. After some research and real estate agent and appraiser input, this is what I discovered.

Return On Investment (ROI)

What is the ROI of home upgrades
What is ROI?

First of all, do you understand what ROI is? To make it super simple, it’s what you get back from what you put in. Say you put $10,000 into a home repair, and because of that home repair you received $10,000 more on the price of your home. That gives you an ROI of 100% on the home repair. Pretty simple really.

Break Out The Sander?

Break out the sander!
Should you break out the sander?

You really want to do SOMETHING to fix your home up and you have some time to get the project(s) done before you put your home up for sell. What is the best use of your money and time? Real quick, let me point out that the numbers included in this article take into account the total cost of home improvements, including supplies and labor, so if you’re a do-it-yourself whiz, the final estimated costs will likely be lower.

The key question is: is your market hot? Yes? Then don’t do it. Only a couple of the big upgrades historically give an ROI of over 100%! I know, if you’re like me, you always thought that any home improvement would make your home worth more. Well, any home improvement will likely make your home more, but at a cost to you! Overall, in 2019 Americans saw an average ROI on home improvements of only 66.1%, not such a hot number if you’re looking to recoup all of your money and then some! Want a little more explanation? If you sink $66,000 into redoing your entire kitchen it raises your home price by $41,000, was it worth it? In a hot market, no! The exception, of course, is if you’re in a market where selling your home is going to take a lot of time and effort. In that case it might be worth losing $25,000 on your investment just to sell the house, assuming you have a chunk of equity that will soak up the financial loss. Or in worse case scenarios, it might  be worth actually paying for the improvements at a financial loss just to sell the house, because holding onto a home that must be sold can actually cause more headache and financial devastation then keeping it.

What Upgrades Should You Make?

Cleaning supplies.
Deep cleaning earns the highest ROI.

I mentioned that there are a couple of home improvements that are worth the money. In all of my research, I consistently found two home improvement projects that had an ROI over 100%: deep cleaning (935% ROI) and decluttering (432% ROI). That’s it. There are a couple of other improvements that come close to an ROI of 100%: replacing your garage door (97%) and adding manufactured stone veneer to the front of your home (95%). You might find some other improvements that do well, especially in different areas of the country.

Here’s a helpful site that gives you the ability to look into your local city’s data for projects including city job costs, city resale value, city cost recouped, city/region comparison, and city/national comparison. This site will give you an idea of what home improvements help the most in your specific area. But over all there really aren’t that many home improvement projects that actually give you all of your money back and then some. One hundred percent ROI is an elusive beast when it comes to home improvements.

Now that I’ve told you that only two home upgrades have an average ROI of over 100%, are you curious about the ROI on the other home upgrades? Here’s a great chart that shows the national averages on costs and values and sales in 2019:

Home improvement ROIs chart.

ttps://www.realtor.com/news/trends/2019-home-renovations-best-and-worst/

When We Did, And When We Didn’t

Home upgrades don't have to be expensive
Installing automatic sprinklers can help sell your home.

My husband and I have been considering upgrading our home. I love the warm honey oak stain on the wood floors, railing, and cupboards, but it is looking a bit worn. We got a quote on simply refinishing our wood floors and were surprised to find it would cost $1,800. That might not sound like much for a home repair, and it’s not, but it’s more than we wanted to put into the home considering it is in pretty good shape, the yard is beautiful, and we have other obligations to put $1,800 towards.

After researching the benefits and downfalls of home improvements for this article, I shared the results of my research with my husband. We live in an area (Roy, Utah) where the market has been extremely hot for a few years. Homes in our town receive multiple offers above the asking price, so we know that our home would sell quickly should we decide to sell it. In fact, we have some neighbors who recently put their home up for sale and were counseled by their real estate agent not to put any major repairs into it for that exact reason; it’s in good repair and the market is hot right now.

After discussing the current benefits of upgrading our home, we decided not to put much money into home improvements. The appliances are in great shape, as is the roof, garage door, carpets, walls, fixtures, etc. Sure, we’re doing some work on the yard, our son is helping us to put in a new waterfall where our old pond is, and I’m painting doors, etc., but as far as sinking thousands into the house, it’s just not smart. If we do sell the home in the next couple of years, and our market stays like it has been for some time, I’m not too worried about upgrading. However, if the market falls, then we’ll have to revisit the idea of putting some money into the home should we decide to sell it.

There was a time when a home improvement helped us sell a home, however. Let me share an experience that we had years ago with our second home.

We moved to Winnemucca, Nevada, in 2005 and bought a home in our just-starting-out price range. The home was cheap, in the low $120s. In 2005, the housing market was just about dead in Winnemucca. Three years later when we were ready to move back to Utah for a new job, the housing market in Winnemucca had slightly picked up, but was still pretty dead.

In the first year or two of living in Winnemucca, we installed a sprinkler system. The system was a lot of money for us (we have five kids and at that time they were all under 15 years old) and cost about $4,000. It was worth it though because it saved me hauling the hose around the large yard trying to keep it green.

In 2008, we put the home for sale and prepared to move. After a few weeks, nothing had happened. The home needed major upgrades and was nothing special, which didn’t help its prospects in the nearly dead market. Nothing was selling, including our home!

Months passed and my husband had to move to Utah without us so he could start his new job. He lived with my parents while I stayed in Winnemucca so our older kids could finish up the school year.

School ended and the summer passed without any offers. We started looking into renting the home out because the darn thing just wasn’t selling and the housing market in Winnemucca was still lifeless. The time came when we had to move so that the kids could start the school year.

The day we left for Utah our home finally sold even though the market was dead. The offer was just enough to almost clear what we owed on it (we lost a couple thousand dollars) and we attribute the fact that the home sold at all to having the new sprinkler system installed. We were unaware of any other reason that our home sold when nothing else was moving.

In the case of that Winnemucca home, the home improvement was worth it because not being able to sell the house would’ve forced us to rent it out, and considering we were going to live over eight hours away, that wasn’t our ideal option. Losing a bit of money on the home upgrade was worth it!

Is The Market Hot or Cold?

A hot market vs a cold market
A hot market vs a cold market makes all the difference!

To sum up my findings, if your market is hot and your home meets market expectation and is in good shape (appliances are in good working order, the roof doesn’t need replaced, etc), don’t put heavy money into it unless it’s to declutter or deep clean it. However, if your market is tough and you have to sell your home, it might be worth sinking some money into the home so you can actually sell it. Talk to a real estate agent or real estate appraiser to get some input if you’re not sure what to do.

House Showing Tips

Upgrade Your Curb Appeal
Staging your home with a focus on curb appeal can help your home sell faster.

Now that you’ve got some insight into whether it’s worth putting money into your home before you sell it, let’s jump to some low-cost home improvement suggestions that can help your home show better and possibly sell faster. Here are a few things that real estate agents suggest to clients.

  • Open the blinds and curtains. Turn on the lights. Get as much light as you can into your home for the showings.
  • Freshen up the front yard with fresh mulch and flowers. Trim your roses, deadhead any spent blooms, and make sure everything is fresh and alive.
  • Add splashes of color with bright pillows and plants.
  • Replace family photos with neutral pictures.
  • Declutter counter tops, desks, and bureaus.
  • Downsize as much as possible. If you have somewhere to move excess furniture and stuff, move it. If not, minimize the appearance of your possessions as much as possible.
  • Get rid of icky smells. Fill your home with the scent of fresh baked bread (hello bread machine!). Scented candles or plug-ins are discouraged because some customers might be allergic to them or not like your choice of scent.
  • Wipe baseboards, clean your windows, make sure the walls are clean, and clean behind the toilets in the bathrooms.
  • Check your pet’s area. Make sure their bedding and living area is clean. Better yet, take your pets with you when you leave the home for the showing. Some people are allergic to animals, and I admit that if we were ever house hunting and saw signs of cats throughout the house, we’d walk away because my husband is extremely allergic to them (as in breaking-out-in-open-sores allergic).
  • Anything else that you think needs done that adds a little bit of appeal to your home but with minimal cost and effort, go for it!

If you have time, applying new coats of paint onto faded or outdated walls can also make a big difference! If you’re considering doing some quick painting, here’s an interesting tidbit to consider: currently the colors with the widest buyer appeal are:

  • Gray
  • Pewter
  • Beige
  • Off white

Locking Up

Locking Up
Let’s lock up our discussion.

If you’re considering selling your home in the next several months, now is the time to find out if putting money into home improvements is worth it! Research your market, consult real estate professionals, and make the right decision for your bank account!

Good luck!

Filed Under: General News Tagged With: homeowner knowledge

Upgrades: Is It Worth Keeping Up With The Joneses?

June 25, 2020 by Shauna Hatch Leave a Comment

This post was written in the voice of and with the perspective, invaluable experiences and advice of appraiser, Keven Ewell.

Two Questions for Appraisers

Two questions for appraisers.
The most common appraisal questions are….

As an appraiser, I always ask the homeowner if they have any questions that I can answer for them.  I consistently get the same two questions, first, what is my home worth, and second, what can I do to increase the value of my home?

These are both great questions. The first question allows me to explain the home appraisal process and set the expectation of when I will complete the appraisal. The second question allows me to talk a little bit about the market that the home exists in and how the market reacts to specific criteria in that area. 

Home Values in a Neighborhood

How can you add value to your home? Should you upgrade?
How can you add value to your home?

Let’s talk about the second question first. I remember as a new appraiser appraising a home and a homeowner asked about which improvements they could make to increase the value of their home. At the time, I thought I knew the market and the process reasonably well, and so I went into great detail and tried to answer the question with what I thought was an accurate answer. However, as I became more experienced as an appraiser, I learned that my amateur answer was not accurate. Ultimately, it is not about what an appraiser thinks is essential in a neighborhood, but what the homeowner’s value in a neighborhood is that’s important.

Over time, my answer has evolved into a very different response from that detailed explanation that I gave those homeowners years ago.

The Joneses Principle

Keeping up with the Joneses can be expensive! Is it worth it?
Is it worth keeping up with the Jones?

To explain the response that I have developed over the years, let me introduce you to the Joneses Principle; in economics, this principle is known as the Theory of Competition. The principle is simple: a homeowner wants to have what their neighbors have, but they want it to be just a little bit better.

Let me explain how to connect this principle to creating value in a home.

My daughter has been house shopping lately. She came across a house that was priced low in its neighborhood. This home had an on-the-market time that was three times what other homes had in the area.  Of course, as an appraiser family, we were curious about why the house was so much cheaper than others. Was it due to the location, the quality of improvement, the condition, or a combination of reasons?

As we looked into the home and the neighborhood around it, it wasn’t immediately apparent as to why the house was priced so low and not selling. The market had a low supply and there were sales on the subject’s street within the past three months. Not only that, but the homes in the neighborhood had a similar quality of finishing materials and were selling for 10% more than the current asking price of our subject home.

Another plus, or what seemed like a plus, was the interior of the home had been updated and painted. On further inspection, however, an explanation began to evolve.

  • First of all, the house sat on a corner lot and lacked privacy due to a partial fence, giving the homeowner no private areas to enjoy in the yard.
  • Second, not only was the yard quite public, the patio was tiny.
  • And third, every wall in the house was painted a unique color. None of the walls matched! My favorite was the lime green family room. Lime green is one of my wife’s favorite colors; sadly, housing markets do not typically share the same preference!

It was now clear, after a little research, why the home was not selling like its comparables in the neighborhood had. A relatively simple step, such as painting the walls a uniform color, would have given the home a better chance of selling at a higher price. Enclosing the yard and even adding on to the patio would have made an incredible difference and likely would have made the home nearly equal to its comparables.

As appraisers, we are responsible for reading the market. We are also responsible for several other things including:

  • Informing clients about what is happening with the price of homes and the circumstances that influence the prices,
  • Informing clients about what creates value for a home,
  • Informing clients what does not create value for a home,
  • And explaining why value is present or not.

We apply the principles of substitution to help our readers understand our processes. 

Now, when homeowners asked me how they can add value to their home, my answer is to follow the Joneses Principle and fancy up their home just like their neighbors’ homes. If a few trendsetters in the neighborhood add access for a third car to their garage, and if a homeowner sees this and would also like a third car garage, then I recommend that they go ahead and make the upgrade! Not only will the homeowner enjoy the extra room, but the addition will add value to the home because several other homes in the neighborhood have the same upgrade, and together, they increase value to each other’s improvements.

Don’t Overdo It!

Upgraded kitchen, is it worth it?
Is your upgrade too fancy?

A word of caution. If everyone is remodeling kitchens and installing laminate countertops, then a remodeled kitchen with expensive quartz countertops may be too much of an improvement for the neighborhood. The home might sell just fine but not at a high-enough price to justify the extra expense of the quartz countertop.

If done right, however, adding upgrades that are slightly above the rest of the neighborhood might pay off in the long run. For instance, if a homeowner goes to a home show and finds something that they just can’t live without, then I suggest that they add it to their home. If the neighbors like the improvement and follow suit, then the homeowner becomes a trendsetter (aka, the Joneses), and the upgrade has added more value to the home. However, if no one in the neighborhood follows suit due to preference or ability, the update will likely not bring in enough of an increase in the price of the home at selling to recoup the cost of the excessive improvement. If you look at this last situation in a different light, however, it’s not a total loss. The homeowner has something they wanted and got to enjoy the beautiful upgrade to their home despite the cost.

A Piece of the Puzzle

Appraising homes is like putting a puzzle together. Are upgrades worth it?
Piecing it together, are upgrades worth it?

This answer is just one piece of a whole when considering home improvements and whether they add value or not. My response assumes that you let the homeowner (who knows much more about their neighbors’ homes than you ever will as an appraiser) fill in the blanks as they come to understand how the Theory of Competition works in their neighborhood. My goal is to help the homeowner achieve success in creating value in their home. And on a happy side note, my daughter bought that under-priced home, and you can bet that she’ll be making the changes that make the home hers. Someday the home might compare to the houses next to it, and all at a lower price for her!

Coming Up Next…

Looking for some other ideas on increasing the value of your home that go hand in hand with this one? Check out our next blog post, “Should You Upgrade Your Home?”

Filed Under: General News

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