Analyze a “Below-Market” Deal: Historic Pricing

Our final method for determining whether or not a home is a good deal is to compare the current asking price to the historic sale prices of the same home during pre-bubble years. The simplest method is to find the oldest sale record available for the home and compare the total percentage gain from that sale to the current price with the total percentage gain in Seattle’s Case-Shiller index over the same timeframe.

Going back to our example of the 1,800 square foot home priced at $190,000. Let’s say this home last sold in September 1995 for $145,000. The asking price represents a total gain of 31% over the 1995 sale. Seattle’s Case-Shiller index in September 1995 was 73.02, while the latest reading (September) was 145.07, for a total gain of 99%.

Using this measure, assuming that the condition of the home is not dramatically worse than it was in 1995 (granted this could be a big assumption), this home still appears to be a nice candidate for a below-market deal.

It’s also important to run a similar analysis on some of the homes you found when you researched comparable sales. If every home in a neighborhood has seen dramatically smaller gains than Case-Shiller, then that probably indicates that the neighborhood is becoming less desirable, not that all the homes are a great value.

With our recent analysis of the fundamentals showing home prices poised to give up about another 10% before reaching a balanced level, I would say any home that is currently priced more than 15% below the Case-Shiller trendline might be a good deal (again, depending on the neighborhood).

How To: Analyze a “Below-Market” Deal


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

9 comments:

  1. 1

    I don’t see what this gets you over just comparing current value. If you don’t think the current value is correct, why would you assume the value from 2003 (or some other year) was correct?

  2. 2
    rationalguy says:

    US home prices started to get out of whack from historical prices since 1998. Before that house prices on average went up at the rate of inflation for last 100 years. Assuming, condition of house has not drastically changed, one simple rule of thumb is to add rate of inflation to the price of house from the last sale price (assumption it is pre-bubble time i.e before 1998).

  3. 3
    Scotsman says:

    RE: Kary L. Krismer @ 1

    “why would you assume the value from 2003 (or some other year) was correct?”

    Because the world was more rational then.

  4. 4
    rationalguy says:

    I must caution buying house based on historical prices. Even, if ignore what happened in last decade of housing bubble , weak economy, high unemployment rate, huge shadow inventory, the big blow would be coming from retiring of baby boomers in next two decade. Perfect storm.

    This is good report on impact of baby boomers on housing market due to “net selling effect” (people tend to sell more than buy as they grow old) for next two decades.
    http://www.informaworld.com/smpp/content~content=a789053981~db=all~order=pubdate

    Sellers of existing homes provide 85% of the annual supply of homes sold, and home sales are driven by the aging of the population since seniors are net home sellers. The ratio of seniors to working-age residents will increase by 67% over the next two decades; thus
    anticipate the end of a generational housing bubble

    The effect of this will not be uniform with Florida/Arizona etc (warmer climes) will benefit but not so good for higher cost ( CA) and colder climes (Oh, WA, Wi).

    Tim, would be possible to understand the impact of “baby boomer” retirement on seattle housing market??

  5. 5

    By Scotsman @ 3:

    RE: Kary L. Krismer @ 1

    “why would you assume the value from 2003 (or some other year) was correct?”

    Because the world was more rational then.

    For every neighborhood?

  6. 6
    David S says:

    Thanks for keeping it short and sweet Mr T. Have a wonderful Christmas everyone.

  7. 7
    Macro Investor says:

    RE: rationalguy @ 4

    True about the baby boomers. But instead of selling/downsizing, it will be walking away and renting. They’ve lost most of the equity they hoped to retire on. Yet they still have to cut expenses. So they’re stuck in a house that won’t sell and they have no option except to hand it over to the bank.

  8. 8
    kfhoz says:

    RE: rationalguy @ 4

    Thanks for the pointer to the article about baby boomer aging effects, RG.

    Details may matter: the article does not include WA in the “colder” states that will see more sellers than buyers earlier than other states. In the table in Figure 8 on page 12, WA is grouped with AZ, NV, and FL as a state who will have more buyers than sellers until some time after 2030.

    Of course 20 years is a long time and there is more risk that the biz situation in WA will change than risk that the climate will change in AZ, NV, and FL.

  9. 9

    […] market.How To: Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingConclusionPosted in Features | Tagged appraisal, how-to, overvalued, undervalued, valuation, value […]

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