I’ll admit it. Even as an experienced realtor and homeowner, I regularly check the Zillow home estimate, or "Zestimate," on my home and those of neighbors and relatives.
It’s our guilty little pleasure. We all want to know our home's value – whether it’s worth more than last month, last year, or when we bought it.
Whether it’s just vanity or keeping up with the Joneses, everybody wants to think they have the most valuable home on the block, right? (I encounter this often with potential clients when I tell them the Zestimate can be significantly off the mark.)
So let's face facts. The Zestimate is a way to pique homeowners' interest in selling, and both Redfin and Zillow partner with real estate agents who take advantage of that. Actually, any agent may hear from potential clients based on the value they saw online.
The problem is that sometimes, a particular agent may promise a seller an unobtainable price, and the seller signs on with the idea of getting $25,000 or $50,000 or more over what other agents recommended. In the real estate business, we call this "buying a listing."
It’s not an ethical way of getting business, but it happens.
Before the housing market slowed down this summer, we looked at the general factors for Zestimate fluctuations.
Several months into this stagnant market, we're seeing more and more Zestimate drops as conditions change and different home value factors play a bigger role. The guilty pleasure of house value checking now may cause wincing as values decline.
Here's a look at the main factors for why Zestimates, Redfin home estimates, and other home value estimators are showing price drops.
Factor 1: Higher interest rates and inflation
As I noted in previous columns, the cure for high home prices is high home prices. Eventually, demand will fall, and so will prices.
However, the biggest factors pushing down estimated home prices right now are higher interest rates and inflation, which are sidelining many buyers.
Something had to give. With mortgage rates rising to the highest in nearly 20 years, we’ve finally reached that inflection point.
Each three-quarter of a point interest rate hike can add hundreds of dollars to your monthly mortgage payment. The Fed has approved several increases in 2022 alone, and the average 30-year fixed mortgage rate has gone from 3% to 7%.
As a result, home prices are finally cooling off, as it’s the only way for buyers and sellers to make deals work – other than seller help, which I’ll get to later.
To that end, some markets are seeing a decline in sales prices of 10 percent or more in the second half of 2022, even though home prices are still above 2021 prices. But that second-quarter decline will show up in your Zestimate soon if it hasn't already.
Additionally, it's important to note that Zillow says its median error rate for off-market homes nationally is 7.52%. Keep that in mind as you compare values that a comparative market analysis (CMA) from an agent will be more accurate.
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Factor 2: Missing square footage
Your Zestimate might need to include the square footage that you added. For example, my investors who buy homes in Baltimore often add a 500- to 800-square-foot addition by enlarging basements or constructing an addition at the rear.
And with soaring equity, many homeowners have used lines of credit or home improvement loans to add square footage.
Make sure your realtor knows of any additions to square footage and adds the information to the MLS. It may not show up in your Zestimate, but it will help explain to potential buyers why your sales price is over the Zestimate.
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Factor 3: Crime rate
"What’s the crime rate in this neighborhood?" Real estate agents dread that question. But, unfortunately, we can’t tell you because it could seem we were steering you to or away from a particular neighborhood.
That’s a slam-dunk violation of federal housing law and a quick way to lose your real estate license.
But the grim reality in 2022 is that crime has edged up in many metropolitan areas. And while most of this is non-violent property crime, crime rate reports affect real estate sales in a way that the real estate industry can’t talk about.
In fact, Trulia, a Zillow Group member site, dropped its "crime overlay" filter from its search engines in the past year for listings after complaints from social justice groups saying it was de facto "steering" and reinforced racial bias. Also, Redfin recently decided not to add a crime overlay to its search engine.
Still, buyers use stand-alone crime statistics websites to guide their real estate decisions.
The bottom line? A 2019 real estate study concluded that a 1% crime rate increase drives down real estate prices by 1.5%.
Factor 4: Short sales, foreclosures, and seller concessions
Short sales and foreclosures virtually disappeared from the scene during the red-hot pandemic market. That meant they weren't dragging down neighborhood values and your Zestimate.
However, those "apples to oranges" comparisons could affect your home's Zestimate in today's stagnant market, with surging foreclosures and short sales.
A related factor is seller concessions, which had all but disappeared during the hot pandemic market. Now they're back as sellers are increasingly desperate to attract a buyer.
But seller help throws off your Zestimate as it doesn’t account for the credit given at closing to help the buyers with closing costs. So instead, it just shows up as a lower sales price.
When you work with a good realtor, they’ll know to adjust for that closing help discount that’s lowering market prices as well as throwing out short sales and foreclosure sales that drag down your competitive market analysis, or CMA.
The reality is that Zillow, Redfin and other estimation platforms are much less accurate than a well-prepared competitive market analysis (CMA) from a professional realtor.
In this difficult market, knowing your home's true market value can make the difference between getting the best price vs. not selling at all.