Location has long been touted as the most important variable affecting the value of residential real estate. Recently, the S&P/Case-Shiller Home Price Indices suggested that location is still a front-runner in terms of determining valuation.
In October 2010, four cities in the 10-city composite index registered price gains from the previous year: Los Angeles (3.3 percent), San Diego (3 percent), San Francisco (2.2 percent) and Washington, D.C. (3.7 percent). In many cities around the country, like Las Vegas and Detroit, home prices continue to decline.
The front-runners listed above are coastal port-of-entry cities. Three are in California. However, the inland cities of California — Fresno, Merced, Bakersfield and Riverside, to name a few — are not experiencing the same relatively good price performance. They are still plagued with a surplus of foreclosure inventory and high unemployment.
A large number of foreclosures and short sales in an area can bring the overall price of homes down. It’s difficult for appraisers to find nondistressed comparable sales to support higher prices because of the lack of conventional, nondistressed sales. However, if there are only a few distressed sales in an area, the distressed sales will probably not have much if any effect on the valuation of conventional sales.
Location within an area can also influence home values. Some market niches in an area are doing better than others. A niche need not be a physical location. It could be a price range. For example, well-priced listings in the $1 million to $1.4 million price range in Piedmont, Calif., have been selling relatively quickly, sometimes with more than one offer. The $3 million and above price range has not been doing as well.
HOUSE-HUNTING TIP: Today’s buyers are usually willing to pay more for homes that have a good "walk to" score. That is, they are within walking distance of shops, parks, cafes and transportation. Buyers with children often prefer a location close to schools. However, the value of a home might be diminished if it is located too close to a school — such as across the street.
Proximity to a major metropolitan area usually has a positive impact on prices, particularly when combined with a good public transportation. Employment opportunities in the area also boost home prices.
Supply and demand are up there with location in terms of impact on price. A surplus of unsold inventory gives buyers choice and a lack of a sense of urgency. Too little inventory relative to demand has the reverse effect. This usually puts an upward pressure on prices. Sellers in sought-after neighborhoods who put their homes on the market when there’s little for sale often sell for more than they anticipated.
Buyers take the condition of the property into account before they make an offer to purchase. A home with a lot of deferred maintenance might put off buyers altogether, particularly in the current market. If buyers make offers on homes that have been neglected, they will factor work that needs to be done into their price.
Deferred maintenance can be corrected. Incurable defects can put a bigger damper on price, particularly in a down market. An incurable defect, like being located next to a freeway or on a busy street, is something that can’t be corrected. You’ll have to live with it.
In a hot market, buyers often overlook these defects because prices are rising and buyers are more willing to make compromises. In a slow market, with no urgency to buy immediately, buyers are pickier. They take their time and buy when they find the right house.
THE CLOSING: Price accommodations need to be made to overcome buyers’ objections to incurable defects.