If you see a real estate agent blogging and referencing “appreciation” or “depreciation,” take a close look at how they are deriving their conclusion on the movement of value in the housing market. Often times, you will read sentences that transition from the average home price in an area to depreciation or appreciation, but this is an unfortunate mistake.
The short-term movement in average home prices in an area says more about “what buyers are buying” than “what homes are worth.” We saw an excellent example of this last year when the Homebuyer Tax Credit hit full stride. Since the credit was geared more towards the lower end of the market, we saw the lower end pick up speed going into the summer at a far higher rate than we saw the upper end of the market.
This had the effect of lowering the average home price (more lower end homes were selling than higher end homes), though the entire market heated up and we actually saw values hold in most areas. Ignorant bloggers and certain “professional organizations” were reporting depreciation when in fact they should have been reporting the change in homebuyer demographics.
After the tax credit ended in June, we saw a similar reversal occur, with the same inaccurate reporting by many. The lower end of the market cooled down at a far greater pace than did the upper end of the market, thus we saw an increase in the average sales price of homes in most areas. Again, this was not an indication of appreciation, rather it was the result a drastic change in one end of the home buying demographic.
How To Measure Real Estate Appreciation
The most accurate way to measure real estate appreciation is to take a sample of home sales in an area, over time, and compare the recent sales price with the previous selling prices for the same home. If your sample size is large enough, you can make a fairly accurate analysis of appreciation in that specific market area.
Of course, if you don’t have a staff of bean-counters at your beck and call, the next most accurate way to estimate real estate appreciation is to compare price per square foot in a market over time. If your sample size is large enough, the noise in the data (differing home amenities, land, pools, etc.) becomes insignificant.
Example Of Real Estate Appreciation Graph
The following is a graph of the 32301 zip code for the past 6 years. It measure both the price movement (average home price) as well as the value movement (average price per square foot). Note how they at times are polar opposites, when values rise and price fall, and vice versa.
During the past six years in the 32301 zip code, average prices have fallen 31%, but values have actually fallen 41%. This is not a marginal difference! More importantly, imagine if you were thinking of buying a home in a market because you thought values had stabilized, only to discover through proper analysis that buyers were just larger homes at the same old average price!
This is not an uncommon occurrence in many markets today. The fact is, mortgage interest rates are low and buyers can buy more house for the “monthly payment” than they could in the past. This has helped prop-up average prices far better than it has average values, where the competition among home sellers is at its greatest point during my 21 year career.
So, the moral of (this) story is that when you read about the changes in the average price of a home in a certain area, just remember these reports are not comparing “apples to apples.” Just as the average price is changing, so is the average home. If buyers are choosing larger homes, then values are dropping even faster than prices.