Ever wonder: “How much is my house worth?”
When we track our net worth, one of the line items is the value of our home. We keep it as an offset against the mortgage, otherwise our net worth would be lopsided.
One of the challenges with home values is that it's difficult to mark them to the market. “Mark to market” just means assigning a value based on what the market has determined is the true price. It's easy when you have a public company's stock – it gets traded all the time every day on the public markets. If you want to know the price of Apple stock, look up APPL.
Homes are not. You have “comparables,” which I feel is a thing people make up for appraisals because it's better than nothing, but those aren't truly accurate. Even if you live in a condo with identical units, there is enough variance that it's not accurate. Is a 2 bedroom, 1 bathroom on the first floor the same as the same bed/bath on the top floor? How much is the top floor worth? Too much variance.
My solution to our tracking is to set the home value at the purchase price and leave it at that forever. I like it because it's simple and I don't care about home value when it comes to our net worth (sadly, this is quite uncommon since most of American's net worth is locked in home equity).
What Affects Home Value?
Before we get into appraisals and data, you might be wondering what factors might impact your home's values. I turned to Dr. Michael E. Bitter, Rinker Distinguished Professor of Accounting at Stetson University. He listed the following as major factors affecting the value of one's home:
- Home size (e.g., bedrooms and bathrooms),
- School zoning,
- Mortgage interest rates,
- Regional and national housing markets
And when selling a home, additional factors include curb appeal and pricing.
He also adds:
For most young professionals, one's home will, by far, be the largest (and most illiquid) asset owned. The valuation of your home impacts your net worth and your ability to borrow against the home.
Valuation is also important in determining that you have adequate replacement value on your homeowner's policy. That said, while it's good to have a reasonable idea of the value of your home, it is not critical unless you are planning to sell it.
Is Knowing Home Value Important?
You might be wondering… why is it important to know the value of our home? If we're not selling, is it really important to keep track of that sort of thing?
Professor Robert Solomon, Clinical Professor of Law at UC Irvine School of Law, explains there are a lot of reasons why you want to know.
If you are selling, it’s very important. If you are borrowing against the value, it’s sort of important, but the bank will do the valuation work for you and your main concern is ability to repay. If you are close to retirement or relocating, it’s very important.
If you are younger, raising a family, and expect to live in the home for more than five years, it’s less meaningful, and estimating future value is nice as you determine wealth, but it’s all on paper and not that important.
When I asked if there's too much emphasis on home values, he told me:
It depends who you are and your overall financial situation. Home equity and education remain the major ways to build wealth in the United States. If you have children and you have little savings, you may expect to borrow against the home equity to pay for college.
If you have no children or they are on their own, you may be depending on home equity for retirement, but you may not. If you expect to relocate, you may be content to pay off your mortgage and have enough equity for a down-payment, but you don’t want to be under water.
Circumstances change, and home value is just one factor.
If you have a specific reason for knowing, such as a home equity loan, then getting an accurate figure is important. It may be worth it to pay someone (and you may be forced to by the bank) to get an accurate assessment.
If you just want to know for your own personal needs, a free appraisal is often good enough.
Let's see what some of those options are…
Use an Actual Appraisal
There may come a time when we need a home appraisal, perhaps for a home equity loan or line of credit. In the event we do, I'll treat that as an accurate home valuation and adjust our home value in the spreadsheet.
For what it's worth, if we get an “professional” appraisal, I would adjust our home value to the results of that appraisal.
Use Tax Assessments
It's what the tax man uses to assess property taxes, it seems reasonable to use this to value your home.
The tricky part with this figure is that you may try to decrease it, to lower your tax burden, and that might mean it's value is lower than what it would sell for. If you're OK with this discrepency, this seems like a fine way to fake a “mark to market” every few years.
Use Historic Median Home Price Growth Rates
Historic data from the U.S. Census has shown that median home prices don't rise all that quickly.
In 1940, the median price of a home was $2,938. (these figures have NOT been adjusted for inflation)
In 2000, the median price of a home was $119,600.
That's an annual growth rate of about 6.37%. (if adjusted for inflation, the growth rate is a mere 2.3%)
You could get more specific to the state level – for Maryland that's a growth rate of 6.67%. (it's even lower if you just look from 1990-2000, the growth rate is a mere 2.28%)
Set the growth rate to 6% per annum, so you have a little buffer, and then leave it alone.
I love hearing stories of people buying homes in 1980 for $30,000 and then selling them 20 years later for a tidy sum. The numbers get big because everything gets big over 20 years. $30,000 in January 1980 is the equivalent of $65,000 in January 2000. (the accurate way to think about it is that over those 20 years, the purchasing power of a dollar was cut in half)
What is the inflation figure we should use? I think CPI-U (inflation for all urban consumers, it's all items except food and energy) is probably the best bet and you can get the figures from the BLS.
The numbers for each month is not monthly inflation, it's inflation for the previous 12 months through that month. So September 2017 showing 1.7% indicates that when you include September, inflation for the previous 12 months was 1.7%.
If I were to use this, I'd look at the inflation figure for December of each year, adjust my home value once a year and call it a day.
Use Home Price Tools to Check
There are a ton of tools you can use to get a free online home appraisal. Since you're doing this for tracking purposes, I would not waste money on this.
As for accuracy, it's hard to say. Make sure the information they have on your home is accurate – including but not limited to square feet, bedrooms, bathrooms, and age of the home.
We purchased our home four years ago so the “accuracy” will simply be a percentage value away from our home value. Oddly, our home didn't appear in a lot of these tools so there won't be an accuracy figure.
Here are some of the more popular free home appraisal tools I found (with some caveats and warnings):
- Zillow – They're one of the biggest real estate sites and they offer a Zestimate, which is an estimate for your home's value. You can sign up for an account, claim a home, and they'll email you updates if their Zestimate changes. (Accuracy 2.4%)
- Redfin – Redfin is both a real estate research site and a brokerage, but when you claim your home you can get an estimate of home value based on your home's characteristics.
- Realtor.com – Unlike the other sites, which are geared towards homes, realtor.com has the home search, estimates, and whatnot; but also articles and videos related to real estate. They have a home estimate tool on their site, which doesn't require you to sign in or claim a home to see a home estimate. Sadly, our home was not listed (which is weird, all of our neighbors are listed).
- eepraisal.com – They will pull data from a variety of sources, including Zillow's Zestimate, to make a determination. Their tool shows neighboring sales in a convenient way. They did not have an eppraisal.com estimate for our home.
- Trulia – Trulia is similar to Zillow in its design and purpose but it does not offer an estimate of home value.
- Chase Home Value Estimator – Enter your address, click Get Value, and get an estimate straight from Chase. I can't tell what data powers this tool but for my address there was no estimate. I pulled up an estimate for our previous home and it seemed within reasonable range.
- ReMax – As a broker, ReMax probably wants to sell your house but you can use their tool anyway. Sadly, our address is not listed for some reason. The tool is easy to use, includes a nice Google Map. and you can fly around your neighborhood sneaking a peek into your neighbor's financial windows.
- HomeGain (do not use this tool) – I stopped the process of getting a home value estimate because it required my name, phone number, and email to be sent to AgentHomeValues.com – I didn't want an “expert agent” to give me a “detailed market analysis.” I would skip these guys.
If I were to do this, I'd just pick Zillow and normalize the figure to my purchase price in year one and take the adjustments. So if I bought a house for $100,000 and Zillow said it was worth $50,000 – I'd double Zillow's Zestimate from now until eternity.
How do you handle your home's value in net worth tracking?
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Lily @ The Frugal Gene says
Very useful stats! I knew Redfin had to be much more accurate than Zillow!!
We use tax assessments for our net worth and funnily, we did try to argue down the property tax estimate with the city, but it was rejected. They want their tax money, what can I say.
When we sell, we use Redfin estimates instead because those are usually dead on for our neck of the woods.
Jim Wang says
Those are both solid ways to do it!
Amy @ LifeZemplified says
We refinanced to a 15-year mortgage last year and had a new appraisal done so I use that figure. I like to look at Zillow and Redfin for fun.
I bought in 2006 (so you know my pain), and therefore I can’t use that number for my net worth tracking. I’ve been underwater on my mortgage for 11.5 years.
I currently use Zillow, since that’s what Personal Capital allows me to link to automatically, which even provides updates as often as DAILY!
I tried to re-finance in January of this year, but the appraisal came back at barely more than 50% of the purchase price from 2006. (90k vs 175k). I live in a townhouse which is very rare in this suburban corner of Florida. Apparently they won’t compare me to either SFR or Condo units of similar size, so it left me being compared to much older, run-down units. He discounted ALL of my property improvements as “expected” in a unit of this age, while I know that none of the other 9 units in my building have anywhere near these upgrades. Disappointing, since that officially killed me chances at the ReFi.
Jim Wang says
How did the the appraisal compare to Zillow?
Appraisal was $90k. Zillow (at that time) was around $104k
Jim Wang says
That seems like a big difference (~17%), which is fine for net worth calculations but disastrous for anything real. That stinks.
Tim Sutherland says
I use Personal Capital to track everything…investments, home value, bank, etc. It’s awesome and free. I’ve used it for years with no issue and two factor authentication is mandatory.
They call you and want to put money under their management which I can’t speak for since I’ve never done it. Regardless, I found the call useful.
Anyway, regarding houses if you input your address it grabs the zillow estimate and updates it whenever you login. You can see your net worth almost exactly whenever you want.
Jim Wang says
Yeah, I do that too and I declined their wealth management service too. I’m a big fan of their Retirement analyzer tool, it’s really interesting to think about especially when my retirement is so far away.
Zillow is inaccurate for our zip code. Their estimates are very volatile for some reason. This year it shot up in the summer and back down in the winter. I guess that’s the problem with limited inventory. The tax assessment is way off too. It’s usually too low after a few years.
I’d got with actual appraisal too.
Jim Wang says
All of these tools are very fickle but like anything else that relies on data, it’s only as good as the data. If, like your case, it’s limited then you’ll get huge jumps. Those jumps aren’t too helpful when it comes to net worth tracking though. 🙁