How To Determine Real Estate Appreciation (or Depreciation)
There has been some debate lately in the Tallahassee real estate market regarding how one would measure appreciation rates of homes in a given real estate market.
Some people like to think that you compare the median home price in our market today with the median home price from a year ago, and that will show you the current appreciation. I disagree. Completely. Vehemently. Patently.
O.K. I'm out of big words. I believe that the median home price cannot be used to measure appreciation because the median home itself does not remain constant. It's not saying an apple a year ago cost $.29, and today it costs $.32, therefore it appreciated.
You see, last year, after the end of the boom market, the median home size in Tallahassee might have been 2,000 square feet. Now that prices are dropping, but interest rates are so good, buyers might be choosing to spend the same amount of money but just purchase "more house for the money!"
This year's median home size could be 2,100 square feet. That means that we could see the median home price in Tallahassee stay flat, but still have depreciation occurring in our market. Does that make sense? Certainly. Definitely. Absolutely.
O.K. So now that we know how NOT to measure real estate appreciation, how about we tackle the issue itself?
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Measuring Real Estate Appreciation
I believe that a real math-whiz person could take a fair, random sampling of homes that have sold in Tallahassee and then run a simple analysis. This analysis would consider all homes that have sold recently and then see how much they have gained (or lost) since their last sale.
With that in mind, and understanding that I do not have the time to ensure that our sample is "fairly" random, or that I can tell you what my margin of error will be, I went ahead and grabbed 10% of the closed single-family home sales from the month of May in the Tallahassee real estate market.
I made sure that the ones that I selected were "arms length" sales (meaning not family member to family member) and entered the information into a simple spreadsheet and found the following:
|Home Location||PreviousSale Price||Recent Sale Price||PreviousSale Date||RecentSale Date||Annual Appreciation Rate|
|Hill Gail Trail||$195,900||$200,000||12/9/2005||5/12/2008||0.86%|
|Ivy Green Trail||$265,000||$290,000||11/8/2004||5/19/2008||2.59%|
|Meadow Ridge Drive||$195,000||$400,000||6/3/1994||5/29/2008||5.27%|
|Man O War Trail||$78,800||$175,000||3/3/1993||5/12/2008||5.39%|
|Hill 'N Dale Street||$80,000||$180,000||12/2/1991||5/2/2008||5.06%|
The average annual appreciation rate in this group is about 4% (3.97%). Anything purchased in 2005 or more recently in this group has depreciated. Any home purchased in 2004 or prior has appreciated.
I suspect this means that properties were appreciating over time until the market peaked in 2005. Since then, the market has "taken some back." If you purchased your home recently, it might be worth less than you paid. However, if you purchased it prior to 2005, most likely is still is worth more than you paid.
Take a close look at the home on Buckeye trace (it is listed twice in blue). It was sold after being purchased in 2007 and it was sold for 3% less than it had been purchased.
But the prior owner, who owned it from 2004 to 2007, had an annual appreciation rate of 12.5%. The previous owner had perfect market timing, hitting the best two years of real estate appreciation that the Tallahassee real estate market has seen since I began measuring in 1991.
Most likely this data is too small of a sample to be absolute “proof” of anything, I would suspect these kinds of numbers to hold true for the entire market. Home values peaked in 2005 and we are now seeing real estate depreciation in the Tallahassee real estate market.
If you would like to see the full Tallahassee Real Estate Market Report, just follow this link.
Your Local Expert In Tallahassee
I hope this helps provide some insight on real estate valuations. This is why you should hire a trusted expert in your local market area to give you the best advice.
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Very interesting analysis. I was wondering, would taking the square footage cost/value of like homes be an accurate means to gauge appreciation/depreciation?
Great question Ray. I hope you don’t mind, but I put your question in the comment section of the blog so others could see it. You’ve hit the nail on the head. I wrote about this last month in a blog about using price per square foot to calculate appreciation.
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