Understanding home values in your neighborhood

Are home values decreasing in your neighborhood? Here are 3 tips to help you answer this question.

1) First, get to know the months of inventory in your area. A neighborhood with a high level of inventory (greater than 9 months) is more likely to experience price pressure than a neighborhood with less inventory. You can start by viewing these home and condo updates which track inventory levels by MLS location. Taking this a step further, you can ask a realtor to zero in on the months of inventory for your specific neighborhood. Calculating the months of inventory is a quick exercise for anyone who has access to MLS sales and listing information.

2) Review the sales history in your neighborhood. Can you find any homes which sold in 2006 or 2007, and then sold again in 2008? If so, did these homes sell for more or less the second time around? If you find evidence of homes selling for less, this is an indication that home values may be decreasing in your area.

3) Review the inventory of active listings in your area. Were any of these homes bought within the last two years? If so, is the current list price at or below the recent purchase price? If you find homes listed at or below the most recent purchase price, this is another indication that home values may be decreasing in your neighborhood.

Here's an example of how a friend and I used the above steps to evaluate home values in her neighborhood, a newer subdivision in Waunakee.

1) We calculated the months of inventory for her subdivision - 14.5 months. Definitely high.

2) We found 4 homes which sold in 2008 that also sold in either 2006 or 2007. Two of these homes sold at a slight increase. The other two homes sold at a decrease - one for $10,000 and the other for $30,000 less that the most recent purchase price.

3) We found one active listing for a home that was purchased in the last two years. This home was listed for $29,000 less than its most recent purchase price.

Adding it all up, my friend has a good picture of the market in her neighborhood, where home values are definitely feeling the pressure of the slower market. We'll be performing this same exercise a few months down the line as she gets ready to sell her home. Based on all of the information we have now, we know she'll need a a very aggressive marketing plan and a well-chosen price point.

And one final thought. The example above is about someone planning to sell, but this exercise can also be useful for someone planning to buy. For example, a buyer going through a similar exercise may use the results to determine when and where she chooses to buy. She might also use the results of her research as a bargaining chip when it comes time to negotiate. If she has market information which clearly shows homes selling for less, she might choose to share this information with the seller. Food for thought...