calculating how much a house should be worth…

[23109VC]

i’m very indecisive. it’s just how I am.

[Reality]

“To the poster that asked why you can’t apply a rent multiplier in San Diego, I should have qualified it by saying “you can’t apply it now” since it has never been this silly.”

Wasn’t that the point of the original post, to get an idea of what prices should be when things aren’t “this silly”?

[34f3f3f]

Interesting is the use of the word “should” with reference to calculating houses values, but let’s not get into that one. I would have thought that using just ten years of historical data is not enough, because the last five years are going to distort the trend.

Forgetting the importance of rents for the moment and just focussing on historical data the following may be helpful. From 1940 to 2000 the median inflation adjusted price of a house in the US has risen 390%. California was almost double that for the same period at 570%. For the last five years, house prices in the US have risen 180%, and for California 247%. Taking California in isolation, historically the market grew about 9% per annum to 2000 over a sixty year period. So if the median price was $211k in 2000, the compounded figure in 2007 will be $385k at a 9% annual average increase. If you were to use the straight line or other statistical methods to caluculate from 1940 to 2007, you’d arrive at a figure between $385 and today’s prices.

I have no evidence that the data above is accurate, but it looks sort of plausible.

[Bugs]

The point where the upswing met the long term trendline was in late 1998 or so. That’s that point from which you would measure the “should be” value and start adjusting forward.

Starting at 2000 gives you an artificially high baseline because you’re measuring from farther up on the upswing. The average SFR price in the 3rd qtr 1998 was $279,000; the average price in the 3rd qtr 2000 was $355,000. That’s a 20+% difference right there, and relative to the 1940 price the difference between 279 and 355 is even greater.

I don’t think the real avg rate of increase is 9%/year.

[34f3f3f]

I don’t think the real avg rate of increase is 9%/year.

Maybe not! This was a back-of-a-cigarette-packet calculation. I wasn’t really suggesting starting from 2000 to give a meaningful figure. It’s just that the only data I could find was in ten year increments from 1940 and ended in 2000. It doesn’t really matter where you start if you include any of the huge surge in recent prices, because I don’t see how that will give you an idea of where prices “should” be. It’s all hypothetical anyway.

[Author]

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