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).
“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??
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.