Residential Real Estate Prices: Base Points, Timeframes, and Spread
A few posts ago, we looked at the granularity of residential real estate – in essence, how property valuations can be impacted by the most minute details of a home and its location specs. In today’s post, we’ll look at statistics that are floating around in the media and how those are impacting buyer and seller decisions – and how misuse of the information, or misinterpretation of it, can make it more difficult for everyone involved in real estate transactions.
I tell you these points in the hope that you’ll gain a better understanding of:
Why your home may not be selling in a market that’s still considered hot;
Why a home that you want to buy hasn’t dropped in price;
Or, if you’re an agent, how to help your clients get a better handle on accurate pricing and realistic ROI.
1 . Bending data to suit a story doesn’t add up
Data, when analyzed and presented accurately, is a beautiful thing but, in most cases, that doesn’t happen. Instead, when data becomes bent (usually unintentionally) to tell a story, the information presented is simply incorrect.
Here’s an example using today’s housing market. We hear a lot about residential real estate sales dropping by whopping percentages – home sales are down by 35% in one area or prices have fallen by 10% in another.
Without the right context, though – which has to include a baseline for comparison, a timeframe, and a geographic spread, as well as the granularity that we looked at recently – you can’t really know how to interpret the data correctly.
Here’s a very basic example of why percentages, without context, can be misleading.
Let’s say that a week ago, you had an asset worth $100 and, for whatever reason, today it’s worth $150. That’s a 50% increase in value. Let’s say that tomorrow, for whatever reason, the value of your asset will decrease by 50%.
Since your original asset value of $100 went up by 50%, does that mean that when it decreases by 50%, it goes back to $100?
Of course not: A 50% decrease from $150 is $75. And if your asset then increases by 50% again, it doesn’t get you back to $150 – instead, your asset lands at $112.50.
This is why making decisions about how to price your home for sale or what to spend on a home based on the percentages you hear in the news is irrelevant for most buyers, sellers, and agents.
That’s the first point that I want you to keep in mind for today.
2. Return-on-investment has to include a baseline and a timeframe
The next point is that, among other factors, return-on-investment (ROI) has to be based on a real number from a specific point in time. If you’re a seller, for example, the amount that you paid for your home when you bought it, along with the date that you closed, are your starting points. Then, you have to consider your asset’s typical increase in value over time – and largely disregard the anomalies.
So, let’s say that in 2009 (about a decade before the Covid frenzy), you bought your home for $100,000. And let’s say that residential real estate in your area increases in value by five percent a year, on average, which is a nice, solid rate. In 2019, you could expect your home’s value to rise to about $163,000 (provided there were no extenuating circumstances that significantly impacted your community or home upward or downward).
Then, in 2020, the pandemic-fueled home-buying frenzy hit and everything was blown apart. Fast forward a couple of years, when you read this quote from Lawrence Yun, chief economist of the National Association of Realtors, as it appeared on CNN:
“From the pre-Covid end of 2019 to the end of 2022 median prices have soared 42%, said Yun, translating into a $114,000 increase in housing wealth for the typical homeowner.”
And now you’re ready to sell your home which, in your mind, you’ve valued at about $232,000 (up 42% from your 2019 valuation).
In the thick of the pandemic, you may have gotten that and possibly more, but that was an anomaly – it’s not our current reality. High demand and low inventory are still keeping prices elevated, but not at pandemic prices. And because interest rates have risen, buyers are looking for sellers to lower their asking prices.
So, how do you as a seller, or your agent, or a buyer, know what the real value is, especially when data lags by 30-90 days? To be successful in today’s market, you need to take the Covid years with a grain of salt:
If you’re a seller, you need to understand that an advantageous and even excellent ROI can be had still (although not if you bought at the height of the pandemic thinking that you could just cash in – in that case, your investment may be down).
If you’re a buyer, you need to realize that prices will likely not go back to their pre-Covid valuations, but you can still find a good value that will provide you with a solid ROI for the long term. (And as I’ve said in many posts, this isn’t a flipper’s market).
3. “Geographic spread” is a another key to accurate pricing
Here’s the third point: In addition to a baseline price and timeframe, you need to consider what I call the geographic spread for valuations – and this goes back again to the post on the granular nature of home valuations.
In a nutshell, you have to consider where a particular home is within a geographic spread of your area’s most desirable (and, if applicable, least desirable) intrinsic factors.
To illustrate this on the most basic level, let’s say you have a home and you use the continental United States as your geographic spread. If you put that home in a suburb of Chicago, that home will then have a certain value. If you pick it up and move it to Aspen, it will have a certain (and likely higher) value. If you pick it up again and move it to Cleveland, it will have a different value, likely less.
Now, dial this geographic spread in: If you put this same home in a community in coastal Orange County, CA, proximity to the Pacific Ocean becomes the spread point that will further impact that home’s value: On the waterfront, it might command 40-50% more than just a few blocks from the water.
But if that location a few blocks in from the waterfront happens to be within a new, luxury-branded, gated community with a wealth of amenities and access to the beach, then even this non-waterfront home may command prices close to those of waterfront homes. And if this development’s home prices actually exceed those on the waterfront, then eventually, the waterfront home prices will be pushed higher as a result.
Keep in mind, too, that spreads can be fluid. For example, new housing developments can positively impact surrounding, existing homes in many markets (although in some markets, they could actually depress existing-home values, if the housing market is already saturated).
This, friends, is the chess-like reality and strategy of pricing homes correctly, and to know a home’s true value, you need to consider these points – not the percentages up or down that you hear about in the media.