Anyone buying a home wants to make a good investment. For most buyers, this means buying a home in a neighborhood where property values are stable, or better yet, one where home prices are moving up. How can you tell which direction prices are moving. Are they holding steady, continuing to rise or is the bubble beginning to burst? All this talk is constantly moving around throughout the housing market.
Often increases and decreases in home prices are measured in terms of changes in the median price. The median price is the price that is half way between the highest price and the lowest price reported for the period. When the median price increases, this indicates that more buyers bought higher priced homes during this reporting period than they did during the last reporting period. A decline in the median price means that more homebuyers bought less expensive homes during this period than they did during the last period.
Increases and decreases in the median price can indicate a rise or fall in the absolute value of homes. But, this is not necessarily the case. A drop in the median price could indicate an increase in the number of first-time buyers in the market. A rise in the median price might be due to an increase in the number of trade-up buyers in the market.
Determining changes in the real value of homes would be easy to calculate if homes resold every year or two without significant changes being made to them, other than for routine maintenance.
But most homes don't resell on a regular basis. Furthermore, some are remodeled, others neglected. This makes measuring the absolute change in home prices over time more difficult to evaluate.
One way to determine which way prices are moving is to look at what similar homes were selling for several months ago. Your real estate agent, or an appraiser, can provide you with this information.
You might want to look at comparable home sale prices at several points of time -- perhaps 3 months ago, 6 months ago and a year ago. This should tell you if home prices are holding steady or if they're moving upwards or downwards.
Ideally, the comparable properties you look at should be from the immediate neighborhood you're considering. Rates of appreciation and depreciation in home prices can vary considerably from one market to the next even within the same city.
Another way is to find properties that are as similar as possible to the one you're interested in buying. Not all homes in one area will change value at the same rate.
Real estate markets can change quickly. Comparables from several months or a year ago might not give you a true picture of the current market. Find out how long it's taking to sell homes in the area. Multiple Listing Services track this information. If a year ago, the average selling time was 4 months and now it's 2 months, this indicates a shift in the market. Either there are more buyers in the market, or fewer new listings, or both. When this situation occurs, price increases usually follow.
Also look at how close the selling price is to the list price. In soft markets, there is usually a larger gap between the two than there is in a rising market. Find out if homes in the area are selling with multiple offers. This usually means that demand is outstripping the supply of available homes for sale. This situation can drive prices higher.
