Curious for thoughts on this topic. I believe a reasonable method for determining fair value of a property is to go back to a pre-bubble date, figure mid to late 90s if the data is available, but certainly not later than 2002. Take that last sale price and tack on 2% per year until 2012. Some will argue that interest rates are very low so 2% isn't reasonable. My response is that interest rates are low because the economy sucks so that counteracts low rates; demand has been taken out by the bubble since lots of people already purchased property; notwithstanding a 2% increase annually, wages have not increased 2% annually and it is wage growth that enables a buyer to keep up with increased price; long term housing prices at the high end are no more than 3x annual household income.

Is this reasonable? I cannot find anything that is anywhere near this price level -- usually they are 50 to 100% higher in price than my projected fair value.

If you use the method you describe or something similar, or if you align your thinking with such a construct on anything but an "acid-test" or "rule-of-thumb" basis, you are using your own private method of valuing property. And I would therefore discourage you from wandering down those pathways, except as a casual diversion.

I mean, if you were or wanted to be in the business of selling slices of bologna, I would suggest you not specify the thickness in angstrom units. Or flertners, or grelbs, or some other unit you made up. This, in effect, is what you would be doing.

There are standard ways to value property used by appraisers: Replacement value, rental value, recent comparable sales value. Each and every real estate professional you would be coming into contact with in the process of valuing the property will use one or more of those methods. So I would just say that inventing a new one isn't beneficial or useful.

The reality is that an existing property is "worth" what someone is willing and able to pay you for it. No more or less. And that value can fluctuate in a FRIGHTENING fashion based on events.

"Normal pricing measures" don't hold up well in a financial ****storm. Storm's coming...

Yep.

"Replacement cost", "Construction cost" and similar metrics are crap. You're interested in THAT piece of land with THAT structure(s) upon it.

The only thing that ever matters when there is something to sell is what someone will pay for that thing. That's all -- ever -- that matters.

The more exact or near-exact copies of something there are the closer the price will trend to whatever the minimum bidder is for the last one of those things to be bought or sold at a given instant in time. So one gallon of gasoline, if it's $3.50, will probably be the same as any of the next 100 gallons. However, if you want to buy 50,000 gallons, right now, in one town, you might find the price has gone up a bit.....

Houses are more-or-less unique. As a result their price tends to be unique, and entirely dependent on the circumstances -- especially when the market gets illiquid.

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"Replacement cost", "Construction cost" and similar metrics are crap. You're interested in THAT piece of land with THAT structure(s) upon it.

The only thing that ever matters when there is something to sell is what someone will pay for that thing. That's all -- ever -- that matters.

Well, that and "how much am I willing to pay, based on my income and expected future income stability".. A rule of thumb based on that is how I'd screen out potential properties for myself, along with commute distance, taxes, HOA/deed restrictions, utilities.. But none of that matters to a seller, except insofar as I'm probably not alone with those criteria..

Look at what foreclosure properties are selling for in your neighborhood. That's probably represents the "real" value of your home at any given point in time.

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Well, that and "how much am I willing to pay, based on my income and expected future income stability".. A rule of thumb based on that is how I'd screen out potential properties for myself, along with commute distance, taxes, HOA/deed restrictions, utilities.. But none of that matters to a seller, except insofar as I'm probably not alone with those criteria..

That sounds like realtard bull****.

It most-certainly does matter to a seller. The only fact that moves a property is what someone will pay for it. Sellers can be as stubborn as they wish but they will remain sellers and owners until they cut that out.

The only valuation that matters is the one at which an exchange takes place. All other claims are bull****. I love how Realtards will tell you what their opinion of a price is and what it should be, but never will they back it up with a check.

In point of fact that's all it is -- their opinion, and the only validation they can point to is actual transactions and actual closing prices, including all incentives and other games. During the bubble it was very hard to get that number and today it's even worse in the other direction. Off-sheet inducements of various sorts are supposed to not happen but in fact they do happen and they're quite common.

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"Look at what foreclosure properties are selling for in your neighborhood. That's probably represents the "real" value of your home at any given point in time."

Thats a good starting point... but fact is that foreclosures and short sales are sold to a smaller sub-set of potential buyers.

That is.. you can't buy a foreclosure or short sale with a contingency. So you can only buy one if you don't have another home to sell.

In area's with a lot of foreclosures and short sales.. the regular sales tend to sell at a premium compared to those even in similar condition.

If your house is in good shape and looks nice and can be staged to look good.. I would say average comparable foreclosure sale + 5% is a good guess.

A real estate investor once complained to me in 2005 that he couldn't find anything to buy. His rule of thumb was that a property was really worth about 100 x monthly rent, so long as there were no other onerous costs like crazy HOA fees associated with it. If housing loses 50% value, rents will also decline (30%) albeit less due to the lack of leverage in rents. This will destroy all of the highly leveraged real estate investors. The way I see it is that with leverage taken out of the system a lot of people will lose jobs and high wages again and be able to afford much less rent.

Correction:

Housing is worth what the government is willing to loan to you to pay for it via Freddie and Fannie.

That is why housing is still so overvalued. People are too stupid to figure out if they can really afford a house, instead they listen to the banker and the realtor.

Hey, I never said sellers weren't disconnected from reality, just that they don't care what I think.. And the feeling is largely mutual.. If they want to have their precious snowflake out on the market for 800+ days at an outrageous price, my filters wouldn't even register..