Factors That Affect Market Value
Location: The seller has no control over:
- Availability of community amenities, such as public transportation, parks, stores, churches and schools
- Quality and consistency of neighbourhood planning
- Future development plans and local zoning
The Main Features: The seller has limited control over:
- Style, layout, size, age, and quality of construction of the building
- Size, shape, privacy and landscaping of the yard
Condition of the House: On the other hand the seller has total control over:
- First appearances – cleanliness, clutter, and odours
- Condition of the kitchen, bathrooms, windows, flooring, and paint
- Quality and appearance of fixtures
- Décor – modern vs dated
- General overall condition of main systems such as roof, heating, electrical, and plumbing
Comparable Properties: The seller has no control over:
- The asking and selling prices of comparable neighbouring properties
Market Conditions and the Economy The seller has no control over:
- Number of similar properties currently on the market
- Number of people looking to buy
- The state of the local and national economy
- Availability of credit and interest rates
Market Conditions and the Value of Your Home
Notwithstanding the condition or desirability of your home, its value will be affected by current market conditions. There are three broad market conditions that a seller must be aware of when setting the price of his property – a Seller's Market, a Balanced Market, and a Buyer's Market. Two indicators of market conditions is the Sales-To-Listing ratio and the Percentage Change in price compared to the previous year.
The number of buyers exceeds the number of houses on the market (demand is greater than supply), prices are increasing and houses sell quickly. In a seller's market the sales-to-listing ratio is greater than 75% with buyers having few houses from which to choose. As a seller you will probably have more negotiating power and obtain a higher selling price for your property. Unfortunately you will be on the other side of the fence when purchasing your next home.
The number of well priced houses and the number of buyers is stable (supply equals demand). Prices are stable and houses sell within the normal listing period. In this market the sales-to-listing ratio is 60% to 75%. It is a calm market with buyers having a satisfactory number of houses from which to choose.
The supply of homes exceeds the number of buyers (supply greater than demand). In a buyer’s market the sales-to-listing ratio is less than 60% prices are decreasing with buyers having a large number of houses from which to choose. Thus your home may take longer to sell and you will have less negotiating power in terms of the selling price. Fortunately you will be in the driver's seat when making an offer on your next home.
A Case Study
To illustrate the above concepts we will examine the market for single family detached houses listed and sold in the City of Red Deer through the Multiple Listing Service (MLS®) provided by the Central Alberta REALTORS® Association for the years of 2004 through 2008.
Prices were increasing from 2004 through the first quarter 2007 and peaked in April of 2007. This prolonged price increase was followed by decreasing prices through to the end of 2007. There was a short price rally during the first quarter of 2008. However this rally was followed by decreasing prices to end of 2008.
Beginning in the second quarter of 2004 there was a strong seller’s market which continued through first quarter of 2007 with sales-to-listing ratios in excess of 80%. During the second and third quarters the sales-to-listing ratio dropped sharply to 49%. This buyer’s market continued into the first quarter of 2008 with a sales-to-listing ratio of 46% followed by a rally in the second and third quarter of 59% and 72% sales-to listing ratios respectively. The fourth quarter returned to a buyer’s market with a sales-to-listing ratio of 48%. Clearly the sales-to-listing ratio is an indication of market conditions, however caution must be used. The sharp increase in the sales-to-listing ratio during the second and third quarters of 2008 was not followed by an increase in prices. This lack of market response was probably due the state of the world economy.
Another indicator of market conditions is the percentage change in price compared to the corresponding period of the previous year. The above graph shows the percentage change in price for 2005 through 2008. Clearly the most dramatic percentage change in prices occurred when the sales-to listing ratios exceeded 75%, and then as the sales-to-listing ratios moderated there was a corresponding moderation in the percentage change in price. As the market moved into a buyer’s market in 2008 the percentage change became negative.
Setting the Price of Your Home
By considering both indicators, the sales-to-listing ratio and the percentage change in price, a seller is able to determine the market condition. When you know the current market conditions, you are better able to position yourself as a seller with respect to asking price. A realistic asking price will help to sell your property quickly and for top dollar. Given the current market conditions you find a balance between condition, location, features, and benefits and the price of your property.
If your property is overpriced it will be on the market longer and people start to say, "that house has been for sale forever, what's wrong with it?" Not only will an over-priced home take longer to sell, it is also likely to sell for less than its actual value. This is due to the "discount" often associated with properties that have been on the market for a longer than average time. The best way to determine the fair market value of your property is to have a REALTOR® prepare a written Maximum Price Analysis (MPA) for your property.
A Maximum Price Analysis (MPA) must include six elements:
- Comparable active listings
- Comparable sold listings
- Comparable expired listings
- Absorption rate within your price range
- Sales-to-listing ratios
- The percentage change in price compared to previous time periods