Question everything!  Below is an excerpt from an e-mail that I received from one of my clients about a month ago.  She asks a fantastic question, and one that I believe is on many people's minds these days...

On your website (as well as many other local realty sites) people keep saying home prices are stable. How is that determination made?  I understand (& am happy) that we have not experienced the free fall some places have in home values - but as someone who has been watching the local market I am starting to wonder if saying that about the local market is accurate.

So, how do we figure out what is happening with home values in Harrisonburg and Rockingham County?  Below are a variety of ways that you could come to some conclusion --- some are better indicators than others.

1.  Median & Average Sales Price

I use this measure quite regularly in my monthly market report, and this metric indicates that home values are holding (relatively) steady in Harrisonburg and Rockingham County. 

When comparing the 2008 median sales price ($195,000) to the 2007 median sales price ($195,100) we see only a 0.05% decrease. 

When comparing the 2008 average sales price ($223,668) to the 2007 median sales price ($224,394) we see only a 0.32% decrease.

These metrics are often used for observing value trends because they are easy to calculate, and in theory give an all encompassing view of market conditions.  However, in a smaller market, they can be greatly affected by what happens to be selling. 

As an one example of the imperfection of these metrics -- there has been a 40% decline in single family home sales (H'burg & Rock Co) between 2004 and 2008 --- but there has been a 32% increase in single family home sales with sales prices over $400,000.  This shift in what is actually selling, can greatly affect the average and median figures, making them less meaningful.

Another example of the imperfection of these metrics is found by examining single family homes at or larger than 2,500 s.f. sold in the City of Harrisonburg.  In 2007, there were 36 such homes selling at an average sales price of $351,547 and a median sales price of $327,500.  In 2008, there were 31 such homes selling at an average sales price of $336,357 (4.3% decrease) and a median sales price of $305,000 (6.9% decrease).

In a market of our size, average and median home sales prices are useful for observing value trends, but can be quite off the mark for actual market trends.

2.  List to Sell Ratio

Most people would assume that sellers probably aren't getting anywhere near what they used to for their homes expressed as a percentage of their asking price.  I have asked several people to guess, and the general consensus was that sellers were probably getting 99% of their asking price in the "hot market" of 2004 and 2005, and are probably getting only 90% now.

In 2004, a total of 1,507 homes sold in Harrisonburg and Rockingham County at an average of 99.13% of the asking price.

In 2008, a total of 932 homes sold in Harrisonburg and Rockingham County at an average of 96.86% of the asking price.

This shows us that buyers are able to negotiate more off of the sales price, but the difference is not as dramatic as you might suspect.  This metric is most helpful in judging whether the market is a buyer's market or a seller's market.

3.  Changes in Asking Price on Specific Properties

This is an interesting one, and one that my client was quite instrumental in helping me to observe.  She has been observing the market for the past year and a half (roughly) and has seen a dramatic shift in the asking prices of specific homes. 

Changes in the asking price of specific homes can't necessarily reveal any particular market trend, because sellers don't necessarily price their homes at the price the market would suggest. 

If an appraiser conducted a full appraisal of every home in our area before it went on the market, and the home was listed at the appraised value, then if we saw a shift in asking prices, it would be very meaningful.

As it stands, a home seller may price their home well above the market to start, and then continue to lower the price over time after not being able to sell at an above-market price.  Then, because the home sat on the market for so long, buyers are skeptical, and the seller has to lower the price "below-market" in order to sell it. 

Some (many?) observed changes in asking prices on specific homes are an indication of pricing mistakes, rather than market trends.  However, while asking price trends on specific houses won't give as a true indicator of value trends, if we expand this metric to specific neighborhoods or property types we can begin to observe real market trends.

4.  Changes in Asking Prices in Neighborhoods or Property Types

If owners of homes in Belmont (for example) used to be asking $350,000 - $400,000 for their homes, and are now asking $300,000 to $350,000 that may be a good indicator of a change in value.

If owners of two-story townhomes in the City of Harrisonburg built since 2000 used to be asking $160,000 for their townhomes, and are now asking $140,000, that may be a good indicator of a change in value.

This metric is getting close to being a good indicator of market trends, but can be improved if we look at sales prices in specific neighborhoods or property types instead of asking prices.

5.  Changes in Sales Prices in Neighborhoods of Property Types

Again, if we can narrow down the market to a specific neighborhood, property type, age range, square footage range, etc., and then observe average sales prices over time, we will have a very good idea of what is happening with home values in our market.

One challenge here is that we probably want to eventually get back to the "big picture" of what is happening in our entire market --- and it would be quite arduous to create 20-30 (or more) profiles of market segments, calculate changes in average sales prices, and then try to come to some broader conclusions about the entire market. 

But remember --- we came to this as a metric for understanding changes in home values, because we realized (or at least I asserted) that the average (or median) sales price for our entire market isn't necessarily an indicator of what is happening with home values.

6.  What could I have sold my home for, and what can I sell it for now?

This is a very inexact concept, and one that often confounds, frustrates and depresses homeowners. 

Part of the problem with understanding changes in home values within this context is that the first data point (what I could have sold my house for) is often a very rough personal assessment.  For example, "I am sure I could have sold my house for $250,000 a year ago" --- regardless of whether comparable sales data would actually support that.

However, if we take emotional, and imperfect "self assessments" out of the equation, this is a very valuable metric.  If you live in a neighborhood where the homes are all very similar, you can probably have a very good idea of what you could have sold your house for a year ago, and what you could sell it for now.

CONCLUSION

I believe my client's question, and many homeowners' concerns are based on the conflict between several of the metrics above. 

Homeowners sense that there has been a decrease in home values in general, and their home value specifically, but average/median sales price suggest that they have not.  Based on my analysis above, I believe that average and median home sales price are not very helpful in understanding changes in home values in our market.

However, because of the complexity of a true analysis of home values (using criteria #5 and #6 above), we may never have a better sense of what is happening with home values in our market in general, beyond using the quite inexact metrics of average and median home sales prices.

Homeowners (or prospective homeowners), should take the time to understand how their home value has changed over time.  It is not an easy or exact analysis, but it will give you a much better sense of where you have been, where you are now, and where you may be headed in the near future.

I welcome any and all dissenting views, alternative perspectives, suggestions for other value analysis criteria, etc!  Feel free to e-mail me (scott@cbfunkhouser.com), call me (540-578-0102) or leave a comment below.

Receive Updates by Email

Subscribe

Recent Articles:

• There Are Plenty Of Types Of Houses That Exist That Just Are Not Available To Purchase
• Home Sales By Price Range In The City Of Harrisonburg
• Are You Compromising On Aspects Of Your Next Home That You Can Or Cannot Change Later?
• How Much Slower Are The Winter Months In Our Local Housing Market?
• Rockingham County and New Home Sales Drive Surge in Area Housing Market
• Find The Balance Between Optimistic And Realistic Home Pricing
• Room Size Is Difficult To Understand Solely From Real Estate Photos
• How Much Would You Value Not Having To Prepare Your Home For Showings?
• One Out Of Four Homes Is Taking Longer Than A Month To Sell
• Consider The Cost Of Your Planned Renovations When Planning Your Offer

Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com