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How Do We Measure Real Estate Markets?

I’ve been thinking about the way we measure real estate and then how we interpret the information. I use “we” as a general term as in “we the people.” If I buy a stock or a pound of rice, it is a uniform item that I can track what is worth at any given moment.

Real estate isn’t a commodity so doesn’t work like that. If 123 Main Street sells today, it becomes a part of the average and median price of today. We compare that average and median to previous years to determine appreciation. We don’t compare the price of 123 today compared to previous sale price. We can’t. There are so many variables that could have occurred since the previous sale (remodels or lack of, change of neighborhood, etc). IRS cost basis might be more accurate but far from perfect.

The average time between sales is seven years for real property. Even when we can look at the sale and resale of 456 Main Street, it doesn’t necessarily reflect what happened at 457 Main Street.

How do we overcome this and still have numbers that lead to an accurate reflection of the “market?”

8 Comments on “How Do We Measure Real Estate Markets?

  1. “If thou lend money to any of My people,…
    thou shalt not be to him as a creditor;
    neither shall ye lay upon him interest.”
    -Exodus 22:24

    Beyond that, let me say that there is no universal measure, even for a stock or a pound of rice, that will answer the larger question asked. Sure it is easy to price a stock at any given moment, but what value is placed on the stock by each individual investor is another question.

    I recently heard a life insurance commercial on the radio that suggest “a full refund of all premiums paid after 30 years.” I think the implication is “that unlike the market you cannot lose.” It reminded me of my friend who finally sold his gold after 30 years–I consider him to have lost 30 years of time.

    One of the principles of GAAP accounting is historic cost. But then there is recognition that some securities should be valued at market, but securities are broken into categories so that held-to-maturity securities are not valued at market.

    I helped a guy ladder a set of US treasury instruments–the government will pay even if they must print a few extra bucks. His market risk is zero, even if the Net Asset Value goes fluctuates, as he is not going to sell at market.

    In the real estate market there are a whole host of measurements, and most of these bring about sets of difference equations.

    Can a few market indicators replace an excellent mathematician? Is this the FSBO method?

  2. Yeah, wasn’t Krispy Kreme (sp?) stock selling for over $400 at one point?!?! It was just cool to own some Krispy Kreme though not a wise investment choice. I would rather have a dozen warm cream-filled donuts than be cool:O)

  3. I would argue that the excessive speculation in recent years has demonstrated exactly that real estate IS a commodity.
    Perhaps ten years ago it wasn’t. But the speculation in the last few years has turned it into one.

  4. Erm…isn’t there a broad consensus in financial circles?

    C-S and OFHEO use very similar methodologies.

  5. “Erm…isn’t there a broad consensus in financial circles?”

    This begs the following questions:

    1. Who is in the “financial circles?”
    2. What is “broad consensus?”

  6. Real estate was always a commodity. It just used to be exclusively used as such by the wealthy. It temporarily became used by anyone since you could get a loan if you could fog a mirror; standards have tightened now, but anyone who wishes to become a landlord still can so long as they have the capital to back it up.

  7. The question should be, How is real estate NOT a commodity? By any definition of that term it is, and has been for centuries.

  8. Hi to alls

    It is a good post and really like it because I donot know about it and I have a question, Who is in the “financial circles?”

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