Determining the value of a home depends on both art and science. With the increasing availability of massive amounts of housing data and the ability to analyze that information. Analysis of millions of pieces of disparate data informs nearly every decision made involving residential real estate.
March HW Magazine
Consumers, real estate agents, investors, mortgage lenders, insurance companies and other financial institutions need accurate valuations to inform their immediate decisions about investing in real estate and underwriting property. But big data has a deeper value than just estimating today’s property values. Housing data can be used to evaluate ongoing risks that could impact not only future property values but also the cost of maintaining and perhaps repairing properties.
Data is available to predict risk to properties from climate change, natural disasters, typical storms and environmental hazards such as exposure to chemicals from nearby industries or previous industrial use.
Crime data can be used for predictive evaluation of property values, data on development plans and even school district data can be factored in to estimate whether a property will increase in value over time. For real estate investors, homebuyers, appraisers, insurance companies, mortgage lenders and other financial institutions, a deep understanding of the risks associated with a property and a community is essential.
Natural disasters destroy and damage homes and can impact long-term property values. Wildfires in California, Colorado, Oregon and Washington caused insured property losses that were estimated to range between $7 and $13 billion in 2020. According to the Insurance Information Institute, insurance losses due to a natural catastrophe rose to $137 billion in 2017, then dipped in 2019 to $39.6 billion. A natural catastrophe, defined as an event that causes at least $25 million or more in insured property losses, 10 deaths, 50 injuries or 2,000 filed claims or damaged properties, includes a variety of potential incidents. Among the natural disasters that hit property owners in 2020 and earlier years were wildfires, earthquakes, winter storms, floods, hurricanes and tornadoes.
Past information to predict future housing risk
Climate change, particularly rising global temperatures, is likely to increase the frequency and intensity of storms and droughts, according to the U.S. Geological Survey (USGS). In addition, USGS reports that the rising temperatures in the air and in the ocean can lead to increased wind speeds in tropical storms. Rising sea levels cause greater risk to coastal properties.
A recent report from the Urban Land Institute that focused on climate change and real estate investment explains the connection between external factors and real estate. While it may be easy to recognize the potential for physical damage to property from a hurricane, flood or fire and the associated costs in terms of repairs and possibly lower value, even smaller climate changes can incur costs.
For example, more frequent rain or wind or drought conditions can increase wear and tear on properties, cause insurance rates to go up and may require expensive adaptation such as flood mitigation or new materials that resist wind damage.
Accurate analysis of data is just as important as gathering information. For example, it may seem counterintuitive, but home prices in areas with high exposure to natural disasters sometimes appreciate faster than the overall market.
However, areas with specific exposure to wildfires, storm surge and floods are more likely to appreciate more slowly than homes without those risks.
Increased insurance or maintenance costs and reduced property values can be tied to environmental hazards, such as a community developed adjacent to a hazardous waste processing plant. Worse, the Environmental Protection Agency and other agencies have documented the toll on human health of living in a polluted area.
Crime reports influence home values, too, with property prices naturally higher in neighborhoods with a low crime rate compared to similar homes in a community with more crime. While safety is a priority for homebuyers, it is also an important factor for insurance underwriters concerned about the prevalence of theft, which could mean increased claims depending on a home’s location.
School districts are an important factor in homebuyer decisions, cited by 26% of buyers in the 2020 National Association of Realtors Home Buyer and Seller Generational Trends Report. For buyers age 30 to 39, that percentage rises to 36%. Research by the Brookings Institute found that in the largest 100 metropolitan areas, housing values were an average of 2.4 times higher near a high-scoring public school than near a low-scoring public school. An often-cited report from the National Bureau of Economic Research found that for every $1 increase in school spending, housing values rose by $20 in that school’s district.
Even community amenities as basic as proximity to a grocery store – and whether that store is a Whole Foods, a Trader Joe’s or an Aldi – can impact future home values.
Types of data to support decisions
For insurance companies, a thorough analysis of data on everything from the performance of various roof materials in a storm or fire to local crime reports can influence whether a property insurance policy is offered as well as the premiums. Analyzing data on rising sea levels, propensity for earthquakes, hailstorms, floods, tornadoes and hurricanes make an enormous difference to the bottom line for any insurance company. In addition, these companies need up-to-date information about trends that impact repairs and replacement of property such as labor and material expenses.
Similarly, mortgage underwriters and institutional investors must rely on data about physical threats to a home from natural and manmade disasters that could devalue a property or a neighborhood. But for these financial decisions, a deeper analysis of homeownership trends is important.
For example, understanding the risk of foreclosures in a neighborhood, which could negatively impact an individual property, requires broad analysis of home equity levels and mortgage repayment trends. Financial institutions typically rely on appraisers, who in turn need data to support their evaluation of neighborhood values based on community amenities, a desirable school district, proximity to public transit and safety issues.
Consumers and real estate agents rely on an abundance of data about housing market trends on a national, regional, local and neighborhood level. Reports that individuals can access such as data about the previous use of their home, crime reports, school performance and more can be supplemented with the knowledge imparted to their insurance companies and lenders.
Big data, of course, is only as good as the information collected and the analysis done on those facts. Reliable, consistent and accurate collection of information and analysis are important elements to help every participant in the housing market make smarter decisions.
To read the full March issue of HousingWire Magazine, click here.
