If you think your house is worth quite a bit, you may want to reevaluate it. New studies show that most homeowners are likely to overestimate the value of their property.
According to a new study published in the Journal of Housing Economics, homeowners overestimate the value of their properties by about 8%, on average. Researchers combed federal databases, and found that overvaluations are likely tied to owners’ incorrect estimations of the capital gains they’ve accumulated in the house.
What’s more, the most recent edition of a monthly survey by Quicken Loans that compares refinancing applicants’ estimations with appraisers’ results came to a similar conclusion. It found that there’s a “widening gap” on average across the country between what homeowners think their houses are worth, and the properties’ actual market value.
Interestingly enough, the findings of the latest Quicken survey were different than the findings published in the Journal of Housing Economics. Quicken found that there was really only seven-tenths of a percent in difference. At the same time, though, the divergence between homeowner estimation and actuality averaged around 7.5% in 2008.
In other words, this isn’t anything new.
How, then, have homeowners been overestimating their homes for so long? Is it simply a matter of pride of ownership coloring their views, or are there other factors?
The Washington Post reports that homeowners overestimate the value of their house largely because they unrealistically expect larger returns on investment out of their home improvements.
Take kitchen remodels, for example, which accounted for 69% of all home improvement projects in 2012, according to that year’s Remodeling Market Index. Annual real estate surveys show that such remodels virtually never provide ROIs of 100% or even come close to paying off what they cost upon the resale of a home. Based on national averages, a major kitchen remodel that costs about $57,000 returns just about 67.8% — $38,485 — in resale value.
So basically, homeowners think that that $57,000 total gets tacked on to the value of their home, when really only $38,485 does.
Another key reason homeowners have been overestimating their property values is that they don’t understand the valuation dynamics of their local market. For example, an area’s land value might be particularly high, so a tiny house with loads of land around it might sell more for a high-end home that has little to no yard space.
Ultimately, if you’re thinking about selling your home, prepare for the worst value, and hope for the best.