Real Estate: Home Values Versus Home Prices
In real estate, home values are often confused with home prices, so I thought I should explain why they are actually two very different things. The explanation is simple, but its impact on understanding typical real estate reports is rather large.
The average home sales price in any specific market reflects the amount of money that current buyers are willing to spend, while the current average home value represents the change in what homes are actually worth. If ten homes sell for $2M, we can say that the average home price is $200K, but determining the change in value of the homes is entirely another matter.
The Case-Shiller Index is considered a top measurement for determining the changes in home values, as they use past sales versus current sales of the same properties to determine appreciation levels. Of course, the amount of work required to do this limits them to just the largest US housing markets, so most areas of the country have to use another method.
I have found that the best way to track real estate home values, over time, is to compare price per square foot now with price per square foot in the past. This technique is flawed for smaller sets of data, as it does not consider amenities (pools, tennis courts, spas, etc.) and land size differences. But with large enough data sets, this might actually be more accurate than any other method.
But Why Does This Matter?
It is important to understand the difference between average home prices and average real estate home values because most real estate reports that are attempting to show changes in values use average home prices for their data.
I have found that the majority of homebuyers who finance their purchase usually get the "most home" possible for the monthly payment for which they can qualify, and cash buyers typically buy the house that best fits their needs below a specific price. This means that rarely do I see buyers spend less than they plan, rather they get the most for the amount they plan on spending.
Over the long haul, average prices and average values move in the same direction, but the short run offers opportunities for them to travel in opposite directions. With super-low interest rates, homebuyers can get a lot of home for the money. This does not change the fact that excessive supplies are creating pricing pressures among sellers, so we will still see values falling even as buyers can afford to spend more for a home.
Average Home Values In Tallahassee
The real estate graph above shows that we are in the fifth year of depreciating home values in Tallahassee, and the most recent move in values was down. This is the fourth year of major price declines and people who want to sell a home in Tallahassee need to understand that the competition hitting the market is filled with distressed properties, meaning the competition is willing to continue dropping its price until a sale occurs.
So when you next see real estate home values being reported, whether in Tallahassee or any other US housing market, claiming that home values are on the rise, take a quick look to see if they are talking about the average sales price or whether they have actually done the work to really look at home values. The answer will tell you about their true understanding of the current housing market.
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