Real Estate Values: The Real Truth 18 comments
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Since the mid 1980s, reputable groups have published information regarding real estate values and trends by regions of the country. Because many organizations lacked access to specific property data, most importantly the total living area, sales data was always presented as the Median Sale price or, in some cases, the Average Sale Price. Over the past five to seven years, the Median Sale Price is the constant.
As valuation consultants serving the assessment industry, we have discovered over the past ten years the weakness in presenting only the Median Sales Price. Most importantly, what are we comparing to for the baseline. Our analysis focuses on the sale price per square foot, a factor used by the assessment and appraisal industry. Over the past 18 months, we have monitored reports relating to the change in property values and the significant declines. Many economists correctly state that home values exceed the level of affordability as compared to income levels.
Based on this one standard, there appears to be wide spread belief and acceptance relating to the current declines in property values. We do not dispute the adjustment, but rather the statements of how significant the adjustments have been. The following is a perfect example of why we need to study the market on a rate per square foot basis:
- Median Sales Price for Zip Code xxxxx in 2006 was $303,000
- Median Sales Price for Zip Code xxxxx in 2007 was $283,000
- Median Sales Price for Zip Code xxxxx in 2008 was $244,000
The pattern indicates a decline in values of 6.7% from 2006 to 2007, 13.8% from 2007 to 2008 and overall for two years 19.5%.
By adding in the median square footage of the sales and presenting the sale price per square foot, a similar pattern of downward valuation occurs, but the rate of decline is lower:
- Median Sales Price for Zip Code xxxxx in 2006 was $303,000, 2,144 sf $141.32 sppsf
- Median Sales Price for Zip Code xxxxx in 2007 was $283,000, 2,080 sf $136.05 sppsf
- Median Sales Price for Zip Code xxxxx in 2008 was $244,000, 1,980 sf $123.23 sppsf
The pattern indicates a decline in values of 3.8% from 2006 to 2007, 9.5% from 2007 to 2008 and overall for two years 12.9%.
Analysis of sales activity and valuation increases since 1996 indicate to clear patterns:
- The median house size increased because of new construction, with typical homes exceeding 2,100 square feet versus existing homes with a median square footage of 1,850. So part of the valuation increase is based on larger homes selling, not market appreciation. New homes are on average 12% larger than homes built prior to 1996. We have collected and measured this data for over 30 million properties, notably Arizona, Florida and Nevada where there is a oversupply of housing. Each state has different median square footage values, but similar patterns.
- Market appreciation or depreciation can be measured on the quality and condition of the home as well. When a market is appreciating, property owners will maintain their homes because of the potential added value for selling a home in good to excellent condition. Real Estate brokers and agents stress this constantly when selling and showing homes. Buyers also seek houses with low cost of maintenance and repair in a stable and appreciating market. Conversely, when values decline property owners may have limited funds to maintain values and most significantly distressed sales have an impact on property values.
Distressed sales indicate a change in the purchaser profile as well. When foreclosures dominate the market, few buyers are willing to pay top dollar for quality homes, opting instead to acquire a bargain or fixer-upper. These trends in real estate values have occurred in prior down cycles and will reverse to the up cycle trend in the future.
As we emerge from this current down cycle, there needs to be shift in the manner for which data is presented and analyzed. Over or understating valuation changes will only lead to further instability and significant shifts in the real estate cycle.
I look forward to commentary from other professionals relating to this issue.
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And one has to remember that sales of newly constructed homes are probably a tiny fraction of the total housing stock and hence not that important.
Case-Shiller is the right way to measure housing price movements.
If you are getting big differences relative to Case-Shiller, I would be very concerned about the accuracy of your figures.
The burden is on you ...
I'd argue that Hong Kong is the most market efficient real estate market in the world. Property drives the city's wealth (just look at how many billionaires made their fortunes in real estate), and the locals live & breathe real estate. Everyone there looks at specific properties (apartments) at specific parts (streets) of the city, and compare sales prices and rental prices per square feet, normalized for age of property, feng shui, and other factors.
It's about time someone times a more statistically rigorous way of analyzing US property market, and start reporting the real, empirical data, as opposed to generalized and potentially skewed metric!
Sorry guys, I can't bite. Unless you can include a discounted net present closet area factor, that bonus room over the 2.5 car garage is going to make your analysis smell all the way from the optional mud-room bump-out.
Let the realtors quibble over wether or not to include the permit-free grandfathered solarium as "finished" space. A dwelling unit is a dwelling unit.
In 1996, a new home peaked at 144,000, with income at about 42,000. This gives a value of 3.42. Ignoring all other factors, sub-prime, Fed policy, and the credit crisis, if prices had kept in line with incomes there might not have been a housing crisis; a bubble, but not a crisis. The fundamental lack of affordability is the problem.
Say income just kept pace with CPI. It should then come in at about $61,000 for 2009. This gives a house price of 209,000. The Feb. 2009 home price came in at $208,700.
Like every other item demand-supply determines supply. Currently the demand is too low (job losses etc) and supply too high (unsold homes and foreclosures). So home prices will continue to fall, likely another 20/30% down from here.
Several other comments posted to this article appropriately state the affect of housing affordability and the ability to measure additional information. As a nation, we cannot ignore certain facts and rely on techniques that are outdated because we simply lack the desire to measure against additional data elements. Nor can one blindly state the current adjustment is being incorrectly reported. Case Shiller is a valid measurement focusing on 20 regional areas. We need to take the Case Shiller findings and seek greater standards and more data for analyze. The opportunity is upon us to establish a base standard that we can move forward with to minimize manipulation of real estate values in the future.
The one area that is overlooked in the United States is the quality of data used for the Assessment of properties by local jurisdictions. This information is very useful and very accurate in regards to raw data. Over 26 states www.orps.state.ny.us/r... require local jurisdictions to reassess properties at least every five years at 100% of market value or a uniform percentage of market value. The use of this raw data enables statistical research of sales activity and changes in the real estate market.
Independent analysis of this data is critical because the macro level view of the market ignores local bias and development activity. Case Shiller should be applauded for setting a standard to at least provide some unit of measure. The investment community must now seek a standard that demands greater analysis and understanding.
On May 17 11:44 AM American in Paris wrote:
> That's why Case and Shiller rely on resales of homes. The existing
> house stock does not experience significant increases in square footage.
>
>
> And one has to remember that sales of newly constructed homes are
> probably a tiny fraction of the total housing stock and hence not
> that important.
>
> Case-Shiller is the right way to measure housing price movements.
>
>
> If you are getting big differences relative to Case-Shiller, I would
> be very concerned about the accuracy of your figures.
>
> The burden is on you ...
>
Several other comments posted to this article appropriately state the affect of housing affordability and the ability to measure additional information. As a nation, we cannot ignore certain facts and rely on techniques that are outdated because we simply lack the desire to measure against additional data elements. Nor can one blindly state the current adjustment is being incorrectly reported. Case Shiller is a valid measurement focusing on 20 regional areas. We need to take the Case Shiller findings and seek greater standards and more data for analyze. The opportunity is upon us to establish a base standard that we can move forward with to minimize manipulation of real estate values in the future.
The one area that is overlooked in the United States is the quality of data used for the Assessment of properties by local jurisdictions. This information is very useful and very accurate in regards to raw data. Over 26 states www.orps.state.ny.us/r... require local jurisdictions to reassess properties at least every five years at 100% of market value or a uniform percentage of market value. The use of this raw data enables statistical research of sales activity and changes in the real estate market.
Independent analysis of this data is critical because the macro level view of the market ignores local bias and development activity. Case Shiller should be applauded for setting a standard to at least provide some unit of measure. The investment community must now seek a standard that demands greater analysis and understanding.
On May 17 11:44 AM American in Paris wrote:
> That's why Case and Shiller rely on resales of homes. The existing
> house stock does not experience significant increases in square footage.
>
>
> And one has to remember that sales of newly constructed homes are
> probably a tiny fraction of the total housing stock and hence not
> that important.
>
> Case-Shiller is the right way to measure housing price movements.
>
>
> If you are getting big differences relative to Case-Shiller, I would
> be very concerned about the accuracy of your figures.
>
> The burden is on you ...
>
When will market values reflect economic fundamentals and when will analysts stop twisting facts against the cold winds of economic reality?
On the Twelfth of Never,
when the the homeless are classified as unemployed,
when Timothy Geitner spends more time with his family,
when Mr. Mouse moves from his penthouse back to his mouse hole
and when Bernie Madoff is elected president.
As I said, on the Twelfth of Never.
Keep obfuscating and never worry about employment. You'll get a job at the Ministry of Truth when the American economy collapses.
" The median house size increased because of new construction, with typical homes exceeding 2,100 square feet versus existing homes with a median square footage of 1,850."
Assuming argumento that this is correct any mesure of median home price would under estimate the move in price per square foot since median sq ft has increased as well.
Since avg sq ft has increased by 13.5% a median home price fall of 19.5 % should be adjusted upwards by (.135X.195) or 2.6%. This would give you an adjusted price decline of 22.13%.
Your article seems to suggest the inverse. Please correct me if Im reading this wrong ( anyone)
On May 19 02:44 PM Thomas Wagner wrote:
> Given your 1st assumption :
>
> " The median house size increased because of new construction, with
> typical homes exceeding 2,100 square feet versus existing homes with
> a median square footage of 1,850."
>
> Assuming argumento that this is correct any mesure of median home
> price would under estimate the move in price per square foot since
> median sq ft has increased as well.
>
> Since avg sq ft has increased by 13.5% a median home price fall of
> 19.5 % should be adjusted upwards by (.135X.195) or 2.6%. This would
> give you an adjusted price decline of 22.13%.
>
> Your article seems to suggest the inverse. Please correct me if Im
> reading this wrong ( anyone)
>
I see this first hand everyday on the ground floor of the business... academic numbers mean nothing to buyers who have compared 20 homes in any town across the U.S. Buyer confidence changes on a dime, and today's buyers create the data you'll see next month.
The argument I put forth is that more data must be analyzed because real estate is to complex. Building Size, Location (and that means overall location as well as exposure that is negative or postive), Age of Home and Land Size tend to be the most common and high value impacts in real estate.
There are many more components as well, I am just identifying the top four. So as I stated before, why are we only lloking at one.
Case-Shiller: This study focus on resales. The average time between sales is seven to eight years. We need to think about this long and hard.
No one is saying that the markets were not over heated and over valued. What I hear the most is how much have values declined.
Just like appreciation, depreciation must be measured on the same consistent basis. The base data is not the same as it was three years ago. Case-Shiller acknowledges this.