Which is better at valuing your home — you or a computer program?

Oct.October 26, 2018 03:00 PM
(Credit: iStock)

Do you have a pretty good idea of what your house is worth? Could you estimate within, say, 5 percent of what it’s likely to sell for? If so, would that make you more accurate about your home value than an estimate from a computer program loaded with recent sales data and algorithms?

Maybe. Maybe not. Economists at the Federal Reserve recently completed a study that rated homeowners against computer programs — owners’ estimates of their homes’ worth versus those from automated valuation models (AVMs) — and compared both to the actual selling prices of the same homes.

Guess what? It turns out they were, according to the study, “fairly similar.” Despite their reputation for excessive enthusiasm about their homes’ values, owners weren’t trounced by the computers. But neither the humans nor the computer programs were standouts on accuracy. Only about half of the AVM estimates and 40 percent of homeowners’ estimates came within 10 percent of the actual selling price.

The study examined thousands of owners’ estimates provided during a Census Bureau consumer survey in 2014 with AVM estimates on their homes from the same time period provided by a commercial vendor. Then it compared both of these numbers with subsequent selling prices.

The Fed researchers noted that although computer-generated estimates are based on information owners tend not to collect — such as data on sales transactions — these AVMs “can be incorrect if the characteristics of the home are not well measured” or sales prices of a sufficient number of comparable properties are not available.

Owners, on the other hand, know the improvements they’ve made to the house, and they know what the interior looks like — key details that AVMs are missing. What owners tend to lack is stone-cold objectivity. They’re emotionally involved and may have inflated notions of what turns on today’s buyers.

Ultimately the arbiters in the valuation game are the professional appraisers who lenders hire to give them independent estimates. Following an inspection, they’ve got much of the market data that feeds an AVM plus an intimate knowledge of the property. Ask appraisers which estimates they’d bank on — owners’ or computers’ — and you tend to get the same, resounding answer: Neither!

Ryan Lundquist, an appraiser in Sacramento, California, says owners and sellers can be especially bad with estimates because they’re not tuned into current market trends. He said he recently appraised a house that the owner thought should be worth $500,000 more than Lundquist’s estimate — 30 percent over current market value. Owners like that “are profoundly disconnected with reality,” Lundquist told me. They think they’re still in the robust seller’s marketplace of a few years back rather than the market of today, which in many areas is seeing lower appreciation, rising interest rates, and more frequent price markdowns than in recent years.

Lundquist says sellers often fail to understand that buyers today come to the table with a massive advantage — they tend to have far more information on comparable sales and other data, thanks to sites like Zillow, Redfin, Realtor.com and others. They pretty much know the tight price range within which a house should sell and are quick to spot overpricing.

Seller disconnects on value can also create big challenges for real estate agents. Anthony Askowitz, broker-owner of RE/MAX Advance Realty in Miami, told me “the reality is that some sellers need to be fired” because they won’t listen to reason about more realistic pricing, and waste agents’ time and marketing dollars. Recently he worked with a seller who insisted that the house should command $1.25 million. Askowitz’s own estimate, based on recent market data, was $1 million. It sold for $950,000.

Scott Godzyk, owner-broker of Godzyk Realty Group in Manchester, New Hampshire, says he sees it “all the time” — owners think their value is much higher than it really is. Ironically “they show me Zillow” Zestimates, which in his opinion are frequently off-base. Zestimates themselves use Zillow’s in-house AVM, which claims a 4.5 percent median error rate in New Hampshire. That means half of Zestimates there are inaccurate by more than 4.5 percent. Some counties in the state have median error rates as high as 9.5 percent.

The takeaway: Valuing a home is hardly an exact science. Especially in a period when the real-estate cycle is transitioning toward buyers’ advantage in many areas, you need to tap into the data available online, then get the opinions of top realty agents in your neighborhood. That should get you pretty close.

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