The 8 biggest factors that affect home prices

Understanding what influences the real estate market is crucial for homeowners, sellers, and potential buyers alike. For example, home value has likely been an important metric if you've ever considered tapping into your home's equity. Similarly, home costs can drive buyers to — and away from — purchasing a home.

Micro factors affecting home prices 

Property location

We’ve all heard the phrase “location, location, location,” but what does this mean for property prices? Economists encapsulate “location” in something called “hedonic pricing,” which impacts your life and lifestyle:

• Quality of local schools is frequently the most critical factor for buyers with children of school-going age
• Proximity to local employment opportunities is a very high priority for most employment-age buyers
• Proximity to social, shopping, and recreational centers is valued most by younger buyers but plays a vital role in pricing for all homebuyers

‍

These factors are not independent of one another. For example, many parents want to drop their kids off and pick them up at school as part of a reasonable commute to and from work. These three preferences — proximity to school, work, and entertainment/shopping — are a trinity that makes for a treasured property. 

‍

Generally, getting a home with one of the three attributes won’t blow the proverbial roof off the price. However, to get all three, you can expect competition.

Upgrades and renovations

While some buyers actively seek out fixer-upper properties, most homebuyers prefer a move-in ready house. Buyers looking for finished and comfortable homes are willing to pay a reasonable premium for that comfort. 

‍

Additionally, upgrades and improvements tend to hold or increase property through a sale. A new roof, for example, typically recoups more than 59% of its value when the home is sold. To understand regional variations in how renovation investments recoup their value, Remodeling Magazine provides regional reports rich with data. For example, steel entry doors and manufactured stone veneers tend to give Pacific coast homeowners the most bang for their buck upon selling their properties.

Inspection report

In hot markets, buyers may forego their right to an inspection report, but that’s a risk that most mortgage lenders won’t underwrite. For most buyers, mortgage financing is contingent on a favorable inspection — the banks don’t want to lend you money for a termite farm. 

‍

Even if a home is under contract, the inspection report can significantly impact the price of the house — usually downwards as the buyer uncovers previously undisclosed issues that require repairs. Ultimately, the more recommended repairs on the report, the more negotiating room a buyer has. Furthermore, if the deal falls through, the seller must disclose the inspection report to future buyers, which decreases the home value more. 

‍

There is no licensing or certification for inspectors by the state of California, which makes inspections something of a wild west. Experienced inspectors usually come with Errors & Omissions (E&O) insurance to cover themselves in case of a mistake — the absence of this insurance is a red flag. Using referrals from friends, families, and real estate agents and calling references from an inspector’s actual past customers will help you find an inspector you can trust. 

Neighborhood comps

Comparable properties, sometimes called “comps,” sold in your area also impact your home’s market value. Appraisers and real estate agents look at recent home sales with similar features to use as a benchmark against your home’s potential price. Foreclosures and short sales often complicate things because they sell at lower prices, decreasing the neighborhood’s overall average sales price. Comps (along with offer details) are usually the key driver for the appraisal process. Most appraisers will rely heavily on recent nearby transactions on homes of a similar size to yours.

Appraisal value

An appraisal is the real estate industry's formal process for pricing a property. All states require appraisers (for any federally regulated lender) to be licensed or certified by an organization accredited by the Appraiser Qualifications Board (AQB). 

‍

An appraisal is almost always required whenever a loan involves financing a property purchase or home equity borrowing. Most lenders won't approve a loan for more than the appraised amount. So if the assessed value falls short, the seller needs to lower the price, or the buyer needs to put extra money down to decrease the loan amount. 

‍

Additionally, if the appraiser deems there is a structural issue, such as a faulty roof or termite damage, the bank will not approve the loan until the problems are fixed — most often at the seller's expense. Appraisers follow a structured process for evaluating the property by looking at recent comparable sales (see above) to establish a benchmark price and then adjusting the price up or down according to the upgrades and improvements you have or have not made relative to the comparable properties.