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Measuring Changing Real Esate Values ...

There are several methods of measuring changes in real estate values. One of the inherent problems with any method of measuring market change is that it really isn't very accurate to attempt to reduce changes in the market to a single number. Properties will change value at different rates depending on location, size, age and etc. For instance, one of our benchmark properties is a three bedroom, 1 bath, 1,052 square foot home in the Stafford Avenue area. It increased in value from $82,000 in January of 1998 to $250,000 in Septeber of 2005 (an increase of 205%). Another of our benchmark homes is a 4 bedroom, 2 bath, 2,397 square foot home in the Greenwood Estates area. It's value during the same period increased from $185,000 to $470,000. While this represents a much larger increase as measured in dollars, the percentage increase was only 155%.

Here are three methods of measuring changing real estate values.

Benchmark Analysis - This is my favorite method and provides the data for our Yuba City Market Value Index chart. I was first introduced to this method in the 1970's by an Ag appraiser with the Federal Land Bank (FLB).

Benchmark analysis starts with the selection of benchmark properties. These are representative of the market being analyzed. The FLB would select different types of farms from different parts of the county. Then, on an annual basis, they would appraise these farms. The change in value was then measured to determine the percent of apprecation or depreciation.

We currently have six benchmark homes in Yuba City that we evaluate on a monthly basis. The two homes referenced above represent the extremes.

An assumption is made that the condition of the benchmark properties remains unchanged so that only changes in the market are being measured.

The beauty of this system for measuring changes in the housing market is that there are enoungh sales to allow an appraisal or market analysis (CMA) every month. That allows for really precise measurement of changing market conditions.

The biggest limitation of this method is the one discussed above - properties change value at different rates so one index number cannot give an accurate assessment of what all properties are doing.

Another drawback to this system is that it is a lot of work.

Median Home Price - This is undoubtedly the most common method used to measure changes in the real estate market. One of the reasons for this method's popularity is because it is easy. Every good Multiple Listing Service (MLS) software program does this easily and displays it automatically with any real estate search.

The drawback of this method is that it does not measure changes in property values. Instead, it measures what buyers are willing to pay. The result is that median homes prices may be going up while actual property values are declining. This may seem somewhat contradictory at first glance. However, think of it this way, when the median home price is increasing and property values are declining, it just means that buyers are getting more for their money. As you can see on our Median Home Price chart, median home prices were relativey stable for a two and a half year period beginning in February of 2009 while the Yuba City Market Value Index was showing a slight but steady decline. In February of 2009, a buyer purchasing the median priced home (about $158,000) could get a home under 20 years old with about 1,300 to 1,400 square feet of living area. In July of 2011, a buyer purchasing the median priced home (about $150,000) could get a similar home with about 1,600 square feet of living area.

Paired Sales Analysis - This involves searching for homes that have sold twice and measuring the difference in time and price. For instance, the home at 1583 Portola Valley sold on January 19, 2004 for $220,000. It then sold again on July 16, 2004 for $259,900. The $39,900 increase in six months represents an appreciation of 18% for an annualized rate of 36%. If you get enough of these sales it gives you a pretty good indication of how fast the market is changing.

There are some problems with using paired sales analysis. If the first sale was of a home sold as a fixer upper and the second was of the home after it was fixed up, then you don't know how much of the increase was due to changes in the market and how much was due to changes in the condition of the property.

Another problem with paired sales analysis is that you don't always know if there was distress involved in either sale. For instance, was the first sale to an investor who simply recognized an exceptional value and then resold it for a profit? Or, quite often, a second sale in a short period of time is the result of some distress on the part of the owner so the second sale may have been at below market value.

A good paired sales analysis needs to look at the individaul sales to determine if there were significant changes in condition between the two sales or if either sale was a distress sale. Both of these situations would cause you to exclude these sales from the anyalysis.


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quotes"I have nothing but great things to say about Lloyd and his wife, Tracy. They sold my home in four days and helped us get the home that we wanted. He followed up on all details above and beyond anything I expected. He has my highest recommendation.
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Lloyd Leighton Realtors

Address: 1212 Highland Avenue
Yuba City, CA 95991-6115

Phone: (530) 671-6152
Fax: (530) 671-3904

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