How To Measure Depreciation In Your Housing Market

A few weeks ago I wrote a blog about FSU Grads wanting to return to Tallahassee. It discussed the obstacles (jobs) to returning, as well as concerns about current and future home values. The blog was a response to a long-time reader who now resides in Ohio and would like to return one day.

After he read the post, he commented

“On the comment about pricing, and I’m sure you already know this, the Tampa, Orlando and Ft. Myers areas (all cities with jobs) are seeing average declines of almost 50%. These numbers may factor in the shadow inventory, but the valuations are really down (as I know from a recent appraisal of my condo). Given where the Tallahassee market came from, and the other factors mentioned, there’s probably more to go. Bad news for sellers, but potentially good news for us “return wannabees”.”

While I am no expert in the other real estate markets that he mentioned, I can tell you I am skeptical of “average declines of almost 50%” across these market areas.

Understanding Real Estate Depreciation

I have written numerous posts about home values versus home prices. When most real estate reports are published, they comment on what the “average home price” is doing. They typically correlate appreciation/depreciation to the average prices of homes that have sold. But this is wrong!

The average home sales price correlates to how much buyers are currently paying, not what home values are doing. As an example, last month we saw a developer liquidate 75 condos by drastically lowering the prices on the units. That means that roughly 1 in 5 homes purchased in Tallahassee last month were one of these condos.

This large condo sale brought the average home price in Tallahassee down significantly, because the average price for one of these condo units was well below $100,000. Does this mean that ALL homes depreciated by a large margin last month? Of course not.

Home Buyers Want The Tax Credit

Currently, in Tallahassee and Tampa, Orlando, Ft. Myers and everywhere else, the median and lower priced buyers have a large stimulus check that is motivating them to buy. This means that more lower priced homes are selling now than we would normally expect. This increase in the lower segment of home values is bringing down the average home price. Does this mean depreciation? No, not by itself it doesn’t!

Measuring Real Estate Depreciation

The only true way to measure real estate depreciation is to take a large enough sampling of recent home sales and compare them with the previous sales of the exact same homes. This is a very tedious process and not many people have the time or resources to do it. But there is another way that we can measure real estate depreciation and appreciation that is fairly accurate.

Rather than focus on average home prices, we focus on average price per foot over time. If we measure the trend of average values this way, we can get a realistic view of how much the real estate market has depreciated.

Real Estate Graphs Show Real Estate Depreciation

When we look at the following real estate graph, we see what average home prices (broken down into 6 different size categories) have done in the Tallahassee real estate market:

Based upon the graph above and using conventional real estate mis-reporting, we could say that the average home price in Tallahassee hit a peak of $241,703 in September of 2007, and in November of last year it registered at $176,378. This is a drop of 27% for the average home price in Tallahassee. Does this mean depreciation of 27%?

[see why real depreciation is so different from this figure]