Estimating house values from sales data

If you happen to own stock in a publicly traded company, it’s pretty easy to know what your investment is worth.  Exact information on how the market values that asset is available in real time, at least when securities markets are open.  Even if you don’t sell your own stock, its current market value is determined by those who do.  This is in spite of the fact that on any given day it is usually only a tiny percentage of a company’s shareholders who effectively set the stock’s value by selling their shares.  Though you may have an entirely different view of the true value of the stock shares you own, if you want to sell them you will have to accept what the market has dictated.  When you acknowledge that the market has reset the value of your stock shares, you are doing what’s known as “marking to market.”

But what’s relatively easy to do for stocks and other kinds of securities is difficult to do for your own home.  “Marking to market” in the real estate world is, to put it mildly, an inexact science.  Houses are one-of-a-kind assets, and your home’s characteristics will vary in some degree from each of the homes that may have recently sold in your neighborhood.   Interpolating the value of your house from data on the sales of other homes is therefore no easy task.

For certain of my neighbors who tell me they intend to leave their houses “feet first,” the need to value their homes as an investment is minimal at best.  For most the rest of us, however, the value of our houses is of more-than-academic interest.  Each of us probably expects to sell our home at some point in the future, and our personal sense of wealth and security may well be tied to what we perceive as our house’s value.  After all, for most of us our home is the most expensive asset we will ever own.

So when we hear that the median sales price of a house in the Seattle area has declined by 27% from the market high, what might that aggregate number imply about the value of our own residence?   Is it reasonable to assume that our own abode is now worth about 73% of what it was in 2007?

The short answer to that question is “not necessarily.”  For one thing, market changes within a region may not be uniform across neighborhoods.  Madison Park may not be experiencing the same degree of decline as, say, Rainier Beach.  Another major factor to take into consideration is the fact that the mix of housing sold in any given period may be different from that sold in a subsequent period, making comparisons a bit tenuous.  Last year, for example, a lot of sales in Seattle were apparently driven by federal tax incentives that have since expired.  It is highly likely that more of those sales occurred in the lower tier of the market than in the upper tier.  This might have had the effect of overstating the real decline in values, since relatively more houses in the lower tier may have been selling than was true before or after.

To illustrate the point, here is a simplistic example of how a distortion might occur due to the mix of homes sold in different time periods:  If four houses sold in a particular month at $500,000, $700,000, $1,000,000 and $2,000,000 respectively, the median price of homes sold that month would be $850,000, the midpoint at which 50% of the sales were higher and 50% were lower.  If in the next month all of the same sales again occurred except for the $2,000,000 house, the median sale price for the remaining three houses would be $700,000, an 18% reduction from the previous month’s number.  That certainly doesn’t imply that all of the other houses in the market (for sale or not) have suddenly fallen 18% in value.  The total number and the mix of sales is simply too small to warrant such a conclusion.

Madison Park, as we all know, is a rarefied market, with the median sales price consistently in excess of $1 million.  At the same time, of the 2,800 or so housing units in this market, only ten or fewer are being sold each month, on average.   What kind of conclusion can legitimately be drawn from the monthly or even the annual sales data under these circumstances?

Well, it’s been suggested by more than one reader that as a way to normalize for the differences in the types of houses sold in different periods, we should start looking at the price per square foot of these houses.  When we do so, we see that between 2007 and 2010 the value of houses sold in our market may have fallen by under 20%.  At the height of the local market in 2007, the price per square foot of the 56 houses sold was $498.37.  In 2010 the price per square foot of the 71 houses sold was $418.37, an $80 drop or 16%.  This is significantly less than the 27% fall reported in Seattle-area median sale prices for single-family residences.  But this is hardly an apples-to-apples comparison.  Moreover, there is an anomaly.  Although the height of the market in terms of the median house’s sale price was in 2007, the height of the Madison Park market in terms of price per square foot came in 2008, when the average value for the 46 houses sold was $534.70 per square foot.   Comparing 2008 to 2010 in terms of per-square-foot price results in a 22% price decline, still better than the Seattle-area median decline.

Finally, another way to look the change in housing values in Madison Park is provided by real-estate data site Zillow. Last year Zillow pegged our neighborhood as the absolute worst in the region in terms of declining values.  The news since then doesn’t appear that bad, however.  The Zillow Home Value Index, which provides a rough estimate of the median value of houses in Madison Park (Broadmoor excluded), has declined from $723,000 at March 1, 2010 to $718,000 on the same date in 2011.  That’s only a 0.6% decline year over year and a surprisingly stable performance for the twelve-month period, relative to the bumpy ride after the market high of $1,001,000 recorded September 1, 2007.

This more-recent news is certainly encouraging for those of us not planning to take a “feet first” exit from our homes.  In the period through the end of March 2011, Madison Park, indeed, showed the second-best performance of any of the 88 Seattle-area neighborhoods surveyed. Compared to Madison Park’s under-1% decline, Seattle as a whole suffered an 8% year-over-year fall in average value, according to Zillow.  Rainier Beach, by contrast, was down 17.2% and nearby Capitol Hill was down 7.3%. 

Reporting this good news at the end of this posting, by the way, is an example of what’s known in the business as “burying your lead.” However, we really thought you should first see those graphs.

[Photo: This 2,820 sq. ft. 1925 home located at 3805 E. Madison Street, has a rooftop deck with a surprisingly good view.  Priced at $799,000, it is a current listing of Monica Tracey of Windermere Real Estate.]