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.