Real estate pricing

From Wikipedia, the free encyclopedia

Globe icon This article or section deals primarily with the United States and does not represent a worldwide view of the subject.
Please improve this article or discuss the issue on the talk page.
Homes in Monterey County, California, are some of the most expensive in the Unites States. This home comprises roughly 1,800 sq. ft. and is valued at approximately $700,000.
Homes in Monterey County, California, are some of the most expensive in the Unites States. This home comprises roughly 1,800 sq. ft. and is valued at approximately $700,000.

There are two major ways in which aggregate home prices are reported: median and mean (average). Prices are also calculated by square foot, using both the mean and median price. Real estate prices have had a profound impact on urban, as well as the suburban and rural landscape. The most important government measurement of home prices in the United States is the house price index. Median house prices are reported for metro areas and regions of the country by the private National Association of Realtors.[1]

Contents

[edit] Median home price

A townhouse in Brooklyn Heights in New York City.
A townhouse in Brooklyn Heights in New York City.
Willowood Townhomes in Salinas, California. With a median home price of roughly $620,000, Salinas is one of the most expensive cities in the United States.
Willowood Townhomes in Salinas, California. With a median home price of roughly $620,000, Salinas is one of the most expensive cities in the United States.
A building under construction in downtown San Jose, California, in the heart of Silicon Valley. The San Francisco Bay Area is the third most expensive real estate market in the US, after Santa Barbara, California and the Monterey Bay Area. All three markets are located in California, which, with a median home price of roughly $522,000, is by far the most expensive state in the United States.
A building under construction in downtown San Jose, California, in the heart of Silicon Valley. The San Francisco Bay Area is the third most expensive real estate market in the US, after Santa Barbara, California and the Monterey Bay Area. All three markets are located in California, which, with a median home price of roughly $522,000, is by far the most expensive state in the United States.
Declining real estate prices are often identified as a driving force behind urban decay, as seen here in Harlem in New York City near 125th Street.
Declining real estate prices are often identified as a driving force behind urban decay, as seen here in Harlem in New York City near 125th Street.
The Embarcadero in downtown San Francisco was once the site of a double-decker freeway with cardboard boxes housing the homeless underneath. In the early 1990s, however, the Embarcadero was the site of significant redevelopment efforts, sparked by both the destruction of the freeway by the 1989 Loma Prieta earthquake and rising real estate prices. Today, the Embarcadero serves as one of the San Francisco's most prominent flagship boulevards.
The Embarcadero in downtown San Francisco was once the site of a double-decker freeway with cardboard boxes housing the homeless underneath. In the early 1990s, however, the Embarcadero was the site of significant redevelopment efforts, sparked by both the destruction of the freeway by the 1989 Loma Prieta earthquake and rising real estate prices. Today, the Embarcadero serves as one of the San Francisco's most prominent flagship boulevards.

The median home price is the threshold which divides the real estate market into two equal halves, in reference to pricing. One half of all homes in the market are priced above the median home price, while the other half are priced below it. For example, the median home price in the United States was $213,900 in the fourth quarter of 2005, meaning that half of all homes in the US were priced above $213,900, and half were priced below $213,900. In California, the median home price was $548,000.

The median home price is one of the most common measurements used to compare real estate prices in different markets, areas, and periods. It is said to be less biased than the average since it is not as heavily influenced by the top 2% of homes. For example, the average home price in the US was $264,000 in October 2005, compared with a median home price of $213,900 for the same time period.

[edit] Mean (average) home price

The mean home price, or average home price is the sum of all home prices in a certain area, divided by the number of properties in the same area. For example, inside the Willowood Townhouse complex in Salinas, California, there were five townhouses for sale in March of 2006. The properties were priced as follows: one for $450,000, one for $459,000, two for $465,000, and one for $499,000. The sum of all of these properties is $2,338,000. This number is then divided by five, which equals $467,600. Thus, the mean home price for a townhouse inside Willowood was $467,600 in March 2006.

[edit] Per square foot pricing

In per square foot pricing, the total price or rent of a unit is divided by the square footage of the unit.

[edit] Sales price per square foot

Sometimes real estate prices are measured by the price of each square foot. This allows for a better comparison between differently priced homes as well as homes of different sizes. In this pricing measurement method, the median or mean price of a home is divided by its square footage. For example, a 1,243 sq. ft. home was for sale for $465,000. To find the per square foot price, the price of $465,000 is divided by the square footage of 1,243. The result, $374.09, is the price per square foot for this particular home.

To effectively compare neighborhoods, the mean or median home price of a neighborhood is divided by the mean or median square footage. To refer to our example of Willowood Townhomes in Salinas, CA, the sold units in Willowood range from 1,243 sq. ft. to 1,621 sq. ft. The first four units are each 1,243 sq. ft.; the fifth unit is a little larger, measuring 1,621 sq. ft. The square footage of all units combined is 6,593 sq. ft. This number is divided by five, the number of homes for sale, and the result, 1,318, is the mean square footage. The mean price for the sold townhouses in Willowood of $467,600 is then divided by the mean square footage of 1,318; the result is a mean price of $354.78 per square foot. This also includes the lot the home is built on (which varies in size).

In cities where condo's, co-op's & to some extent townhomes & row houses are more prevelant, the prices do not include the land, since that is not owned by the indiviual but the entire association (though older town homes & row houses sometimes are not part of associations). The size of city lots are generally much smaller than those in the suburbs, measuring sometimes a mere 20 feet wide for a 3 or 4 flat apartment building, with little to no land left for vegetation.

[edit] Rent per square foot

Rent is also calculated by square foot. The rent per square foot is often used as an effective tool in comparing tenements and different markets, when units of different sizes. For example, in March 2006, a given 1,600-square-foot single-family home in Aptos, California charged a monthly rent of $1,800. In order to find the rent per square foot, the rent of $1,800 is divided by the square footage of 1,600, which gives a rent per square foot of $1.12.

Another given 1,140-square-foot single-family home in Aptos, CA had a rent of $1,595 per month. Again, the rent of $1,595 is divided by the square footage of 1,140, which equals $1.40 per square foot. So, even though this home has a lower overall rent, its rent per square foot is actually higher than that of the first home.

[edit] Factors Influencing Real Estate Prices

The variables that drive residential real estate prices can be grouped into macro forces and micro forces. Macro forces include mortgage interest_rates, economic strength (the business_cycle), demographics, and federal taxes. Micro forces include local economic strength, state and municipal zoning, neighborhood features (such as quality of schools), and the condition of the property itself.

[edit] External effects

Real estate prices can have a profound impact on an area. They can cause urban decay, over crowding as well as an urban renaissance.

[edit] Decline

In Harlem and many other inner city areas of large American cities, real estate prices dropped due to lower demand and the resulting surplus in supply. This trend was largely caused by suburban migration. Lower real estate prices had a negative effect on landlords, who in these declining neighborhoods became known as "slumlords." Slumlords are notorious for not caring for the properties and letting them slip into a state of severe disrepair. Often, though, landlords in blighted urban areas did not have funds to care for their worthless and unprofitable properties. In many American slums, the situation became so dire that landlords were known to set their properties on fire in order to commit insurance fraud and collect the insurance policy payouts.

[edit] Overcrowding

In many areas of California, rising real estate prices have had an adverse effect as well. In northern Monterey County, for example, the median home price has risen to approximately $712,000, while the median household income has remained at roughly $48,000. This extreme real estate price hike has excluded the vast majority of potential home buyers from the market. It is now estimated that an income of over $120,000 is needed to live the "average middle-class lifestyle" in Monterey County. In Soledad, California, according to the 2000 US Census, one out of every three housing units is overcrowded.

[edit] Urban Renaissance

In some areas, rising home prices have caused an urban renaissance. Rising home prices can transform unprofitable and decaying properties into potential gold mines. In many areas, landlords renovated their now-profitable properties, while other properties were bought by developers, who renovated them, seeing the neighborhoods' potential. Many downtown areas of large American cities have enjoyed a significant reawakening of interest in inner-city properties, which has rejuvenated these once blighted areas. Thanks in part to rising real estate prices, many inner cities have experienced a true urban renaissance. This can lead to gentrification.

[edit] See also

[edit] External Resources for Determining Real Estate Prices

[edit] References

  1. ^ http://www.realtor.org/Research.nsf/Pages/MetroPrice
Retrieved from "http://en.wikipedia.org../../../r/e/a/Real_estate_pricing.html"