Prices - Up Or Down? By Bill Roberts
There is a lot of talk these days on pricing of real estate. Most of it is wrong.
There is no "magic number" for what a property is worth. That number is arrived at by a meeting of the minds of the buyer and seller, maybe with a little help from his real estate agent.
When prices were going up double-digit percentages each year it wasn't because they were necessarily correct, but rather because a buyer was willing to pay that price. Now it seems that buyers aren't even willing to pay as much as they did last year.
So what is the right price? Maybe a little historical perspective is called for. In the mid nineties a nice house in Bay Park (San Diego) with a view of Mission Bay could be had for less than $200,000.00. San Diego is a growing area. The two main contributing factors to increases in price level are inflation plus the increased demand of a growing area. It is safe to use a factor of 8% compounded annually for this area. That would make an average house in Bay Park to be valued at approximately $550,000.00.
The trouble comes in when you throw in those "crazy" years of speculation and low interest rates. Now we are seeing million dollar valuations in Bay Park. Some of it is due to property improvements (highest and best use) and new construction but over-all the price increases can't be justified. If sellers aren't willing to come down in their asking prices then the market will be flat until the real value overtakes the speculative value. And it will in just a few short years.
If I wanted to buy a house in Bay Park right now I would compute how much I would be willing to pay based on historical data (the cost per square foot in 1995), improvements to the property, and its desirability to me.
It seems to me that having an objective way of looking at prices is far superior to just taking a position that prices are too high. Maybe they are and maybe they're not.
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Goodness. Cost per square foot in 1995?? That would wipe out any appreciation even for cost of living increases which was a stable market until 2002.
Today, I look at prices in about 2002 and compound it up about 3.5% a year and that's about what I'd want to pay. That super appreciation in the years 2003, 2004 and 2005 that can't be justified or sustained.
Or, I'd look at average incomes and qualify a market backed out from qualified buyers for an average. Home prices went way over what folks could or would pay.
They're coming down, but very slowly.