Making sense of house prices

By Marcie Geffner –

It’s no secret that home prices have declined in many U.S. towns and cities. Indeed, the downward trend has been the subject of numerous newspaper headlines, not to mention plenty of cocktail party small talk, water-cooler chitchat and neighborhood gossip.

Yet home prices aren’t just a subject of idle conversation. If you want to buy a home, prices determine which homes you can afford. Or if you already own a home, your home’s value affects whether you can refinance your mortgage, take out a home equity loan or line of credit, or stop paying for mortgage insurance.

Equity is king
Your home’s value is a component of your equity, which is the difference between the value and the amount you owe, often expressed as a percentage. For example, if you borrowed $270,000 to buy a $300,000 home, your equity at the time of purchase would be $30,000, or 10 percent. If the value of your home dropped, your equity would shrink as well. The more equity you have, the easier it should be for you to qualify for a loan, refinance an existing loan or sell your home, if need be.

Unfortunately, much of the readily available information about home prices can be confusing or misleading, which makes it harder to get a true picture of home values in your area. For example, national and local median home prices are widely reported, but don’t necessarily reflect the value of an individual house.

Online information can be confusing
Many people check Web sites that estimate home values to make sense of prices. Online price estimates can be interesting; however, keep in mind that they may not be based on enough accurate data to give a true picture of how much a specific home is worth. For those reasons, national trends and online estimates may be better used as a point of reference than relied on to make major financial decisions.

A REALTOR® can help
If you’re looking for good information about home prices in your area, ask a local REALTOR to prepare a comparative market analysis, or "CMA." A CMA should be based on recent sales prices of homes that are similar in size, location and condition to your home or the home you want to buy. Now that’s data you can count on.

© 2008 LendingTree, LLC. All rights reserved. This story, "Making sense of house prices," is reprinted by the author with permission of LendingTree.