Stealth Factor:  ‘% of Original List Price Received’

“Sellers received an average of 95% of their list price, up 3.6% from July, 2011 and well above the 88.3% seen in early 2011.”

–“The Skinny“; August 10, 2012

While everyone focuses on “headline” gauges of home prices — indices compiled by Case-Shiller, MAAR, etc. — they’re overlooking a stealth factor that is quietly magnifying current home appreciation in many markets today (including the Twin Cities).

The variable?

“Home Selling Price as a Percentage of Asking Price.”

Up 10%?  Or 18%??

Since bottoming at 88.3% in the Twin Cities in early 2011, that statistic — a discount, really — has narrowed significantly, to 95% today.

What does that mean for a $200k house?

Instead of expecting to purchase that home for $176,600 back in January, 2011, Buyers today would expect to pay $190,000 — a bump of almost 8%.

And that’s in a market with “officially” zero price appreciation.

Add to Market Appreciation

In fact, however  — at least based on what I’ve observed as a very active Twin Cities Realtor over that period — that $200k house 18 months ago is now closer to $220k in the Twin Cities.

That’s thanks to very low inventory (at under 17,000 units, the lowest in a decade); a proliferation of first-time Buyers escaping rising rents and very limited selection; and record-breaking low mortgage rates (somewhat countering the sting of rising home prices).

Housing Market Math

Now, go back and re-do the math.

Accounting for today’s average 5% discount from list price, that means Buyers would now expect to pay $209,000 today for a Twin Cities home listed for $220,000, vs. $176,600 less than 2 years ago.

Total price appreciation:  a whopping 18% (vs. the reported 10% or so).

Now, tell me which national housing price index is reporting that number??

(Answer:  none).

Stock Market Parallel

Investing mavens will recognize a parallel with something called stocks’ “price-earnings ratio” (“PE”).

At any given moment, stock prices are a function of this multiple, as well as “nominal” prevailing prices.

So, if XYZ company is earning $5 share in an environment when average PE’s are 15, its stock price should be $75.

Expand that multiple to 25 (which in fact happened during the great 1990’s bull market), and XYZ stock — with no change in the company’s $5 annual earnings — is suddenly worth $125 a share.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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