Comparable Redux

Once upon a time, there was a normal real estate market. In that market there were normal average days on market, normal numbers of both buyers and sellers and normal lenders who had a desire to loan money. During those days it was common to buyers and sellers alike to study the values of a given property by looking at recent sales of comparable properties in their area. In doing that it could be fairly reasonably ascertained what the true market value was for said property. Kind of hard to imagine, huh? Almost a fantasy.

As the market boomed it eventually became almost irrelevant what the comps showed. A house or condo listed in April could easily get 7 or 8 offers and ratify $50,000 or more over the last most recent comp. Then another similar home could be listed in July that got another 7 or 8 offers and sell for $50,000 or more over what the April sale got. Think I’m making this up? In February of 2000 the house at 204 Surfbird was listed for $799,000, got multiple offers and sold for $920,000. During the escrow the buyer discovered another house that he liked better…and listed it again right after it closed escrow in late March (without ever moving into it!) and it got multiple offers again…and it sold the second time for $990,000! During those years buyers would ask me for comparables so that they could reasonably determine what kind of offer they should make for their purchase. The truth was…the comps were irrelevant! The only real determining factor was “how much were you willing to pay over the asking price”. Often you couldn’t get a good feel for that until you made several unsuccessful offers to see how far over asking the type of property you wanted was going.

Until September 15 when the bottom fell out the market here was actually pretty much a normal one. Now the shoe is on an entirely different foot. Now it’s the sellers who want to look at recent comparable sales data! Interestingly, it’s sort of the same experience as before (only backwards). Comps from July of 2008 are irrelevant. Buyers right now are the ones who feel like they can disregard the comps…and go well under them.

Hopefully, one day soon we’ll be looking at comps as a reasonable yardstick for determining value again…I hope it coms sooner rather than later.

Comments

  1. Jim, I think we are going to see this later rather than sooner as the real estate market is slow to adjust prices to reflect market reality. You can see this based on how some homes are priced at or under market right now (a good example is the $850,000 home on Beach Park Blvd that sold almost immediately), while many of them are priced much higher and stay on the market for weeks or months even after taking multiple price reductions.

    As you mention, we had a period where home prices went up rapidly and we are currently experiencing mean reversion to the trend line of 3 to 5% appreciation per year to keep up with inflation.

    http://www.investopedia.com/terms/m/meanreversion.asp

    The funny thing about reversion to the mean is that the sharper the spike on the upside, the decline tends to overshoot the mean on the downside before settling back to long-term trend lines.

    Take a look at this chart for the Phoenix area and the declines that are necessary to get back to mean.

    http://photos1.blogger.com/blogger/4598/960/1600/PhoenixActualAndProjectedMean.0.png

    As you can see from the following article, this projection was from 2006 and it appears that we are not only reverting to the mean, but are overshooting it for markets like Phoenix, Las Vegas, Florida and parts of California.

    http://seekingalpha.com/article/18667-housing-what-does-return-to-mean-really-mean

  2. As usual Asif, a very good job with the analysis. At this point I think just about anything is possible too. This market was reasonably healthy and normal prior to September. You make an interesting point about the $850k Beach Park house, which clearly was priced under market…but it wasn’t enormously under. The fact that it sold right away suggests that buyers will determine what a value is and will respond in kind to it. If that place lingered at that price for months, then that would really prove a significant long term decline.

    I’m clear that we’re a market in decline right now. It’s undeniable and the higher end is really facing a problem holding those values. We’ll see where it all ends but ultimately all of our predictions are really all just guesses…heck, I thought the Denver Broncos would have been alot better this year than they’ve turned out to be too!

    In fairness, I think it’s problematic comparing Phoenix or Las Vegas or Florida to this part of San Mateo County. Real Estate is SUCH a local thing. 2009 is going to be really interesting…I’m still hoping for the mean to come back sooner rather than later. Thanks again for your insights Asif!!

  3. I am glad that there are people who have managed to dig up enough optimism from deep inside during these negative times so as to buy a house that lies smack under the SFO approach path. Perhaps the wonderful sound of 250 or so Boeing 7×7 jets that pass over that house day and night will further spur the optimism and positive attitude of the buyers over the 3 to 7 years that they expect to live in that house.

    I wonder if their and their agents optimism will rub off on me if I have a nice chat with them over the phone regarding the air traffic situation of their new house. 🙂

  4. SteveTinFC says:

    Liko, I live right underneath the flight path. In fact, proably 70% of the time, it’s my house they are over when they put down their landing gear, which is when the noise really kicks in. I used to think like you when we first moved in (1992), but after 6 months and installation of double-paned windows (which, incidentally, saved us close to $175 per month in heating bills!), I don’t even notice them flying over anymore. Yes, they can interrupt a conversation in the backyard on a warm summer’s night. But I’ll tell ya … the view we have of the San Mateo Bridge, proximity to the Bay Trail, and living in such a fantastic planned commmunity … we’ll be living “in the flght path” for many years to come. (Sorry, Jim, no agent fees from my house in the near future!) And given the fact that our home has seen a 150% unrealized return on investment in 16 years (it was probably closer to 200% before this downturn), I don’t think we’re hurting too much! This city is a great place to live … even under the flight path.

  5. Jim Minkey says:

    Steve…I was envisioning a really nice waterfront at Whaler’s for you guys! Come on…isn’t that house too big, small, whatever for you?

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