When seemingly endless statistical reports show steadily declining home values, it is essential to analyze geographic micro-markets to properly assess the value of residential properties. Although many media and data tracking sources will often cite national declines in median housing prices, a significant number of areas, or micro-markets, will simultaneously experience an increase in home values. So how does this micro-market phenomenon repeatedly occur with each turn of the real estate cycle?
As if the old adage of “location, location, location” needs to be repeated ad infinitum, prospective home buyers will attempt to reduce the stress and confusion associated with house shopping by focusing solely on the amenities offered in each home. Unfortunately, when determining the value of a home, features like granite countertops and floor coverings are relatively insignificant when compared to the quality of the neighborhood in which a home is located.
In support of this point, both government assessors and private appraisers utilize the “comparable sales approach” to determine the value of a property. According to this method of valuation, the sizes and prices of homes sold in the surrounding neighborhood are analyzed to determine the worth of the subject property. Some weight will be attributed to the degree of features included in a house, but the value that amenities typically contribute towards a home’s determined worth is relatively nominal. This explains why a discrepancy in price between identical homes located in different geographic micro-markets can often amount to hundreds of thousands of dollars, while a home with unsurpassed amenities may be worth only thirty thousand dollars more than the basic home of similar size across the street.
Housing boom markets often cause home buyers to disregard the importance of location and concentrate only on how much house and how many amenities they can get for the money. Why worry about location when housing values will undoubtedly continue to increase in every neighbourhood? It isn’t until the boom bubble bursts and prices begin to decline that buyers become weary and truly start to analyze whether their prospective purchase will amount to an appreciable investment in the future. As a result, buyers will start to purchase only in quality neighbourhoods. They bypass those areas teeming with rental homes, bank owned foreclosures, and desperate owners and builders rapidly dropping sales prices to compete while driving down the neighbourhood’s comparable home values in the process.
Consequently, home values in quality neighbourhoods are stabilized and eventually increased due to heightened demand generated by these selective buyers steadily reducing the available supply of homes for sale in desirable areas. So despite computer generated statistical reports showing national price declines, stable micro-markets are created, begin to appreciate, and the wheels of the real estate cycle go around and around.