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