A True Measure Of Real Estate Depreciation

Posted by Joe Manausa on Wednesday, February 3rd, 2010 at 12:26pm.

Most national real estate reports monitor what the "average home price" is doing. They typically correlate appreciation and depreciation to average prices of homes that have sold. But this is wrong!

A few weeks ago I wrote a blog about FSU Grads wanting to return to Tallahassee. It discussed the obstacles (jobs) to returning, as well as concerns about current and future home values. The blog was a response to a long-time reader who now resides in Ohio and would like to return one day.

After he read the post, he commented

"On the comment about pricing, and I'm sure you already know this, the Tampa, Orlando and Ft. Myers areas (all cities with jobs) are seeing average declines of almost 50%. These numbers may factor in the shadow inventory, but the valuations are really down (as I know from a recent appraisal of my condo). Given where the Tallahassee market came from, and the other factors mentioned, there's probably more to go.  Bad news for sellers, but potentially good news for us "return wannabees"."

While I am no expert in the other real estate markets that he mentioned, I can tell you I am skeptical of "average declines of almost 50%" across these market areas.

Understanding Real Estate Depreciation

Picture of real estate depreciation in TallahasseeI have written numerous posts about home values versus home prices. When most real estate reports are published, they comment on what the "average home price" is doing. They typically correlate appreciation/depreciation to the average prices of homes that have sold. But this is wrong!

The average home sales price correlates to how much buyers are currently paying, not what home values are doing. As an example, last month we saw a developer liquidate 75 condos by drastically lowering the prices on the units. That means that roughly 1 in 5 homes purchased in Tallahassee last month were one of these condos.

This large condo sale brought the average home price in Tallahassee down significantly, because the average price for one of these condo units was well below $100,000. Does this mean that ALL homes depreciated by a large margin last month? Of course not.

Home Buyers Want The Tax Credit

Currently, in Tallahassee and Tampa, Orlando, Ft. Myers and everywhere else, the median and lower priced buyers have a large stimulus check that is motivating them to buy. This means that more lower priced homes are selling now than we would normally expect. This increase in the lower segment of home values is bringing down the average home price. Does this mean depreciation? No, not by itself it doesn't!

Measuring Real Estate Depreciation

The only true way to measure real estate depreciation is to take a large enough sampling of recent home sales and compare them with the previous sales of the exact same homes. This is a very tedious process and not many people have the time or resources to do it. But there is another way that we can measure real estate depreciation and appreciation that is fairly accurate.

Rather than focus on average home prices, we focus on average price per foot over time. If we measure the trend of average values this way, we can get a realistic view of how much the real estate market has depreciated.

Real Estate Graphs Show Real Estate Depreciation

When we look at the following real estate graph, we see what average home prices (broken down into 6 different size categories) have done in the Tallahassee real estate market:

Based upon the graph above and using conventional real estate mis-reporting, we could say that the average home price in Tallahassee hit a peak of $241,703 in September of 2007, and in November of last year it registered at $176,378. This is a drop of 27% for the average home price in Tallahassee. Does this mean depreciation of 27%?

The next real estate graph shows the average price per square foot for home sales in Tallahassee. We see a similar appearance, but the results are far less spectacular.

Picture Of Average Home Values in Tallahassee

The real estate graph above shows that at the peak of the market, the average home in Tallahassee was selling for $141 per foot in September of 2007 versus $109 per square foot in November of 2009. But this drop of 23% does not compare apples to apples, because seasonal affects have been ignored. Comparing the end of the summer selling season on year, to the middle of the winter season another year is hardly an accurate way to measure real estate depecriation.

Using Trend Analysis To Measure Real Estate Depreciation

This final graph shows the rolling 12 month average home values in Tallahassee. That means that each plot on the graph represents a year's worth of information, so no seasonal affects will distort the conclusions.

In the graph above, we see a fair estimate of real estate depreciation in Tallahassee. The trend stopped rising in February of 2007 when it hit $136 per square foot for homes sold that month. Currently, our trend is down to $116 per square foot and still dropping, thus a fair estimate of real estate depreciation in Tallahassee from the peak of the market until now is 15% and dropping!

National And Regional Real Estate Depreciation Reports

The next time you read a national or regional real estate report, you will be able to judge how well the author really understands what is going on by how he or she determines real estate depreciation. If average prices and depreciation are correlated, then most likely the author does not really understand the numbers being reviewed. So are the Tampa, Orlando, and Fort Myers real estate markets down 50%, I don't know. But if I were in those market areas, I would know how to find out!

So what do you think, the Tallahassee housing market is down 15% and the trend is still dropping, where do you think we'll land?

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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