Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
WASHINGTON (MarketWatch)—Question: We’re thinking of buying a new house and are wondering what features we can add that will add real value. Should we opt, say, for another full bath as opposed to a larger garage or a fireplace? —D.P.
Answer: Most new-home buyers face this question. And owners of existing homes ask the same thing when they consider whether to add on or make other improvements.
You know that spending money will reap rewards when it comes time to sell and move on. But exactly where to put your money for the greatest return is difficult to answer. Among numerous variables, it depends on where you live, what buyers in your region value most and whether you might be over-improving your place in relation to other houses in your neighborhood.
One tool you might look at is the annual Cost vs. Value Report from Remodeling, a trade publication. Another is the recently updated online program from the National Association of Home Builders, which you can use to see how the value of a property might change in response to adding or subtracting various physical and neighborhood features.
The “Single-Family Detached Home Price Estimator” is far from infallible. No statistical model can possibly capture all the features that affect prices, said Paul Emrath, the NAHB economist who built it. Consequently, there’s always a chance that a particular feature is acting in part as a proxy for others.
If, for example, a house has extra large bathrooms or bathrooms with whirlpool tubs and multiple sinks—features which are not considered by the estimator—the model won’t pick it up. And the amount of geographical detail is somewhat limited, so the model estimates the average price across a broad census region as opposed to the exact price of a particular house in a specific neighborhood.
Despite these drawbacks, though, the estimator is head and shoulders above anything else available to potential buyers, improvement-conscious owners or even builders looking for a more exact way to price their offerings based on a plan’s particular features. It has several possible uses:
- Just starting your home search? Use the estimator to get a handle on the likely price differences based on the size of the house or the various amenity packages that may be available.
- Interested in relocating? Consult the model to determine the price of a particular type of house—perhaps one just like the one you live in now—in different parts of the country.
- Unsure about buying a new place or an existing one? Ask the estimator to compare prices of similar houses of different vintages.
- Want to move up to a newer, bigger place with more amenities? The model will give you a rough idea what it might cost to trade up.
Perhaps the estimator’s most interesting aspect is what happens when certain features in the house change. And one of the most enlightening discoveries is the correlation between bedrooms and baths.
“It turns out that a full bathroom has a greater impact on the price of a home that starts out with more bedrooms than baths,” said Emrath, who ran thousands of permutations with numerous variables in working the bugs out of his model. The updated model is based on the latest data from the Census Bureau’s 2009 American Housing Survey, which is national in scope and contains information on more than 2,750 different variables.
The estimator is based on a “standard, new, single-family detached house” built after 2007. Such a place would contain 2,150-square-feet of living space built on a slab with three bedrooms, 2½ baths, a garage, central air, fireplace, dining room and three miscellaneous rooms, which would be a kitchen as well as perhaps a living room, den or home office.
In a southern suburb, the model pegs the price of the above property at $203,874. Adding a third full bath would boost the value by $43,004, whereas adding an extra bedroom would raise the value by just $9,328. Indeed, a full basement, an extra half-bath, a family room or 500 more square feet of living space would all be more valuable than adding a fourth bedroom.
All other features being constant, the estimator says the full basement adds $40,315 to the value of the standard house in this location, while another half-bath is worth $24,469. The family room adds $15,645, while enlarging the place by 500 feet adds $12,902. At the same time, take away the garage and the value drops by $7,227. Removing the dining room lowers the value by $13,187, and omitting the fireplace reduces the value by a whopping $24,132.
The government’s housing data identifies little more than the four principal census regions, so the model is not very specific regarding geographic location. But it is definitive enough to show what the same house will cost in rural and urban locations. For instance, the standard house above would cost just slightly more than $155,000 in a non-metro Midwestern location. But in the one of the large California suburban markets, the same place would run nearly $509,000.
It’s also possible to look at how values vary depending on location within a region, and perhaps answer the question of why the same model house by the same builder is priced differently in different places. The key variable here, of course, is what the builder paid for the land. But beyond that is how far the place is from certain key attributes. Put the standard suburban southern house on the waterfront, for example, and the value jumps by more than $89,000. The value falls dramatically when the house is “near water” but not on the water. But it is still worth $14,000 more than average, according to the estimator.
Proximity to public transportation is another key neighborhood feature, adding $26,100 to the value. But there are what Emrath called “disamenities,” too. For example, if decent shopping is not available within a 15-minute ride, the value slips by $8,800. And as so many owners have learned during the housing market decline, the presence of abandoned houses within 300 feet drops the value by more than $28,000.
Consumers and builders alike can play with the estimator. It can be found on NAHB’s website, www.nahb.org. Click on Housing Data, then Housing’s Economic Impact, and scroll down under the Title tab to the NAHB’s House Price Estimator. A warning, though: You must have Microsoft Excel to make the model work. And your security setting must be adjusted to “low” to allow macros to run.
Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real estate questions to him at email@example.com. Answers will be presented in this column every Friday. However, because of the volume of email he receives, he cannot answer every reader’s query.