Real Estate Depreciation Estimates
Real estate depreciation can be estimated in many ways, and no way is exactly accurate. For example, most real estate reports look to current average home prices and compare them to average home prices in the past, but this is the very least effective way to measure real estate depreciation. The use of average home prices is flawed because it is more of a measure of what buyers are buying as opposed to price changes from time to time.
With historic low interest rates, home buyers who are focused on monthly mortgage payments can "buy more house" now than they could when interest rates were higher. So if real estate values are declining, buyers are purchasing "better" homes than they would if home prices were rising. Real estate depreciation simply cannot be measured in this way.
The Case Shiller Index is considered to be the most accurate measurement of real estate depreciation, as it calculates home price changes from data on repeat sales of single-family homes, comparing repeat sales of the same homes in an effort to study home pricing trends. Unfortunately, the amount of work required to do this type of study means that only the largest metropolitan areas are covered. This technique is also flawed however, as it does not take into account changes to the property (updates, adding rooms, pools, etc.) over time.
My favorite method for determining real estate depreciation over time is to compare average price per square foot from one time period versus another. This method is also flawed, as it does not consider the same property changes as mentioned above, but it is fairly simple to do and provides more accurate results than does the average home price change method.
Real Estate Depreciation By Price Range
When we look at real estate depreciation by price range, we see the lower end of the market has been hammered when compared to the middle and upper end price ranges. I took a look at all home sales in Tallahassee and broke them down into three fairly equal groups (similar number of sales in each price range). The lower tier, properties which sold below $125,000, fell by 38% from 2006 to 2011. Both the middle tier and upper tier (properties that sold above $125,000) fell by a rate of 21.5%.
Real Estate Depreciation By Property Type
The next analysis that I performed was a segmentation by property type, and condos were the hardest hit. Tallahassee condominiums values dropped by 54%, townhouses fell 39%, and single family homes were the least affected, but they still showed a real estate depreciation level of 28%.
Real Estate Depreciation By Area
The final analysis of real estate depreciation that I have included in today's housing report shows how the different quadrants of the Tallahassee real estate market has performed. The Northeast has the strongest showing, with depreciation measured at 24%. The Southeast showed a decline of 34%, the Northwest declined 43%, and the Southwest had the worst showing with a real estate depreciation level of 52%.
Real Estate Depreciation Hits 32%
This report compared average home prices in 2006 with average home sales prices in 2011 (through August) and on average, homes depreciated by 31.8%. These numbers would be higher if I compared it on a monthly basis (the peak of 2006 versus the trough of 2011), but for the sake of simplicity, this is a fair report of real estate depreciation in Tallahassee.
Advice For Home Sellers
Real estate depreciation is not going away any time soon. The supply of homes for sale in Tallahassee is greater than the demand, an that means pricing pressure are not going to ease in the next few years. My advice for home sellers remains unchanged for the past four years. If you can wait another 5 to 7 years, keep your home. But if you know you need to move fairly soon, hire a real estate company with an aggressive home selling plan and sell your home fast to get your best price, and beat the trend of real estate depreciation.