If you saw a headline that said, “Man is hit by car while running and looking at his cell phone”, you might conclude that the runner was partially responsible for the accident. After all, a person shouldn’t be running down the street while looking at their cell phone, right? Then you see the video coverage below, and suddenly a much different story comes to light! Running and looking at a person’s cell phone, while on a tread mill, is a much different situation! See video below.
It is very easy to make assumptions based upon limited information. However, when additional information is provided, it helps to put things into context. Things may look very different in the proper context. This is true in many things in life. How is this the case in real estate?
There’s no shortage of real estate stats out there. It’s easy to look at one housing statistic and assume that it applies to every home in every neighborhood. I wish it were that simple! To really understand how real estate statistics apply to your home, a little context is needed.
Another example is when it comes to sales prices. Appraisers analyze more than just one trend. When analyzing overall neighborhood trends, we start by looking at the stats of all sales in a neighborhood. For instance, when appraising a single-family home, the statistics for all single family home sales in that neighborhood or market area are analyzed. That trend may mirror trends of homes that are comparable to the property being appraised, but not always. Why?
When considering all sales in a neighborhood, or county for that matter, these larger data sets are affected by things like new construction sales, any flipping going on (a home may be purchased at a low price, renovated and re-sold in the same year for considerably more), bank sales and other factors. If there are more luxury homes selling in one part of the year than another, that can impact price trends. In recessions, more bank owned sales take place, which can have a negative impact on housing trends. You get the idea.
After analyzing the macro market trends, the appraiser will zoom-in and analyze trends of comparable sales. The trends of comparable sales are not as affected by some of the factors just mentioned.
Sometimes, the trends of overall sales prices in a market area are the same as what the sales trends of comparable sales are doing. The chart below was taken from a report I recently completed in a neighborhood in Cuyahoga Falls. Clearly, in this neighborhood, the neighborhood trends and the trends of homes comparable to the one I was appraising, were the same.
However, at other times, there is a clear difference between what overall neighborhood housing trends are doing in comparison to what homes, comparable to the property being appraised, are doing. Here is an example from another appraisal I recently completed on the west city of the city of Cleveland.
Sales that are comparable to the home I was appraising in this neighborhood, are completely flat. However, overall neighborhood sales prices are increasing at a rate of 2.6%. I see this on a regular basis in many neighborhoods right now. Appreciation trends are definitely slowing down in most neighborhoods in Northeast Ohio.
What’s interesting is that in Cuyahoga County, where the second example is located, the current county-wide median single-family home sales price for March, increased by 6.5% when compared to the median home sales price for March of 2018. Additionally, in Summit County, where the first example is located, the current county-wide median single-family home sales price for March increased by 15.8% when compared to the median home sales price for March of last year. But keep this in mind. One month of sales data is just a snap shot in time. The annual rates over a twelve or twenty-four month period are going to be different than the year over year price changes.
Since county-wide trends and neighborhood trends can be different than the trends of homes that are comparable to a particular property, does that mean that those trends are not meaningful? Not at all! County-wide and neighborhood trends are an overall indication of the health of the housing market. That information is important to track for those in real estate. All of these trends offer valuable information. Analyzing different trends is much like a doctor who uses a stethoscope. They don’t just listen to your heart. They also listen to your lungs and other areas of your body, when measuring your overall health.
While those macro statistics are important, sometimes I see home owners, and even some agents, who try to apply them to the home that they are selling. This often leads to unrealistic value expectations.
Sample size is another important factor to keep in mind with trends. If the sample size is too small, the trend is going to be more readily skewed by outliers. (Extreme highs and lows) Typically, a sample size of at least thirty sales is desired in order to derive a meaningful trend. Honestly, thirty is really low.
Extra credit: All statistics have a margin of error. That fact should be remembered. If you’re working with statistics, you can determine the margin of error, divide 1 by the square root of the sample size. Then multiply that number by 100. That will give you a percentage of the margin of error for that sample size.
When appraising a property, sometimes it is not possible to find thirty comparable sales to analyze, even going back several years. This is often the case in rural areas. So what does an appraiser do in this situation? I always analyze what comparable properties are currently listed for, as well as what comparable pending sales are priced at. They are usually good indicators of what’s going on in the market right now. If active listings and pending sales are priced lower than sales that have sold within the past year, that’s a sign that things are in decline. However, if listings, and especially pending sales, are higher than sales that have sold within the past year, that is a good sign that sales prices are probably increasing, or are at least generally stable.
When analyzing statistics, remember that there are seasonal changes that affect home prices. For instance, in certain seasons, depending on location, sales prices may decline whereas in other seasons, sales prices may increase. This is usually due to fluctuations in supply and demand throughout the year. That’s why most appraisers will analyze trends going back beyond a year or more, to get some context as to what’s going on now. I typically analyze at least two years worth of data for every appraisal.
Hopefully I didn’t bore you too much with all of this talk on statistics. The key point to take away from this article is to not apply large scale statistics to your home, because those stats don’t usually translate to the same rate for your home.
If you’re interested in getting some context on how your property relates to the overall market, hire a licensed or certified appraiser in your area. Analyzing the market is what we do!
If you’ve just been bored out of your mind by this article, and you made it to this point, perhaps you will enjoy this short commercial. Thanks for being here! Have a great day!
Here is my latest commercial. I hope it makes you laugh a little!
Here are some other articles and videos I enjoyed recently! I hope you will also…
An Unredacted Hack: Housing Spam Edition – Housing Notes by Jonathan Miller
1000 True Fans! – The Real Value Podcast! (PODCAST)
How much is that new roof & AC unit worth? – Sacramento Appraisal Blog
It’s just NOT a cash market like it used to be – Sacramento Appraisal Blog
Is The Agent Liable If No Appraisal Is Done? – Birmingham Appraisal Blog
The Power of Praise – Working RE Magazine – Rachel Massey, SRA, AI-RRS, IFA, CDEI
Can Pricing Indexing Speed Your Work – George Dell’s Analog Blog
Strange Bathrooms; Secret Suburbs; Accurate MLS Data? – APPRAISAL TODAY
Getting Purchase Contracts and are Adjustments Necessary – The Approach Coach Podcast (PODCAST)
April Newsletter – DW Slater Blog
Here are some articles I enjoyed related to Northeast Ohio
Play: CLE’s List of Notable Northeast Ohio Blogs (Thanks for including us in your list!) – Play CLE Blog
Off to market we go: Inside the 2.0 Version of Night Market CLE and Asia Town Food Tours – Karin Connelly Rice Fresh Water Cleveland
Free Samp: All things freein the #CLE, Earth Day Edition – Dana Shugrue – Fresh Water Cleveland
Opal on Pearl – BiteBuff
25 Perfect Weekend Daytrip Destinations Within 4 Hours of Cleveland – Scene
Cleveland Bucket List – Cool Cleveland (PODCAST)
6 thoughts on “In Real Estate, Context Is Key”
Great post Jamie! Context is everything. That’s one of the real failings of the appraisal forms we use for lending. The forms do a poor job of telling the reader that there may be more than one trend to discuss with regard to the subject.
Thanks so much Joe! I totally agree with you! We have to really have to explain what’s going on in our reports. Otherwise our reports might be unintentionally misleading.
Loved the post. I really like the word context too because it’s foundational to value. There are many different markets within the market too as you clearly show in some of your graphs. Great job. And by the way, speaking of context, I couldn’t help but remember this video of that one reporter with the Weather Channel…. https://www.youtube.com/watch?v=tocuyJ1Fu7U
Thank you so much Ryan! Yes indeed! It’s so easy for people to take a stat and run with it, even if they shouldn’t. I totally remember that weather reporter scandal! Awkward! That would have been a great one to use as well. It still cracks me up to view it. Thanks for the link!😂
Great post, Jamie. Context is important in everything especially real estate. Most people only want to infer the positive trends to their property but there are also some negative trends in certain areas but no one wants to use those, right? It’s important to drill down to the most relevant data for the subject property to get the most accurate information.
Thanks so much Tom! Exactly right! This is why appraisals by a licensed or certified appraiser are so valuable. Over the years I’ve come to really appreciate the importance of our deeper analysis of the different market trends that we perform as appraisers. Especially when market trends begin to change. In my area things are softening right now. There’s no question. Though I don’t see that in the larger trends and data that are published for my area with the NAR. And yet, when I pull my own data, I see a different story. In many areas things are softening in terms of appreciation rates. Things are not bad, but they are definitely softening.