Real Estate Appraisals

Appraisers work to reconcile comparable, or comp, real estate prices against the condition of an individual home when estimating property values. Accurate real estate appraisals help private individuals, government officials, and commercial enterprises coordinate plans to buy, sell, rent, or even borrow against property. Real estate transactions, of course, are subjective, which means that appraisals may diverge from actual economic reality. For example, the bank owner of a foreclosed home, may agree to take accept a cash offer beneath the appraised price, in order to quickly write this distressed asset off the books.

Comparable Real Estate

Professional appraisers begin their valuation models with an analysis of recent sales prices for local real estate. Sales activity is narrowed down by city, neighborhood, zip code and subdivision.  Appraised property values are likely to mirror the prices of similar homes within the immediate area. Dimensions and size are particularly important for real estate comp data. A prospective seller who owns a two-bedroom, 1,300 square foot condominium, would logically gauge its value against the selling prices of other two-bedroom condos in the area.

Local supply and demand for real estate obviously influence housing prices. Resort destinations and thriving downtown cityscapes support strong appraisal values, because of their limited building space against a prevalence of available jobs. San Francisco, Miami Beach, Boston, Seattle, and Washington, D.C., are examples of expensive real estate markets notable for limited building space.

Real Estate Trends

Appraised property values account for features that are specific to each home. Real estate investors and homeowners often complete improvement projects, such as flooring and cabinetwork to enhance value. Be advised that the popularity and appraisal value of distinct home features shift over time. For example, early 2000’s real estate buyers prioritized city living alongside the chic appeal of hardwood floors, exposed brick and stainless steel appliances. These shifts in tastes oppose the 1980’s, when homebuyers preferred suburban cul-de-sacs of white picket fences and dual car garages. Popular real estate trends also vary according to geography.

Mortgage Interest Rates

Mortgage interest rates are strong leading indicators for housing market performance. Low mortgage rates improve overall access to home financing, which typically works to improve aggregate demand. Improved real estate demand, of course, supports higher prices. Conversely, high interest rates increase the monthly housing costs of owning real estate.  Over time, expensive mortgage financing costs are likely to lower housing demand and real estate prices.

Federal Reserve Board policy helps influence the mortgage interest rate environment. In recession, the Fed works to lower prevailing interest rates and encourage individuals to take out loans and make investments. Alternatively, the Fed targets higher rates to slow down the economy and control inflation risks. The Fed Reserve Board and The Wall Street Journal publish mortgage and interest rate trends, daily.

Investment Strategy

Successful real estate buyers coordinate strategy according to prevailing economic conditions. In recession, prospective buyers may leverage weak appraisal values to purchase cheap property. Many of these buyers may opt to maintain existing properties as rental units, in order to collect regular income. Alternatively, high appraisals values may be a good opportunity to sell real estate and take profits. The ongoing trend of amateurs entering the real estate business often signals that the property market has already peaked.