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Updated about 11 years ago, 11/17/2013

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J. Martin
Pro Member
#1 Real Estate Events & Meetups Contributor
  • Rental Property Investor
  • Oakland, CA
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Home Price Increases - Truth or Myth? Input from flippers?

J. Martin
Pro Member
#1 Real Estate Events & Meetups Contributor
  • Rental Property Investor
  • Oakland, CA
Posted

As I hear day after day about rising prices and the biggest jump in real estate price indeces since 2006, I wonder how much of the measured increase is not actually due to an improvement in the market, but due to physical improvements in many of the properties being sold. i.e., How much has the mix of the condition of properties sold contributed to decreases and increases in real estate price indeces (e.g., Case/Shiller) throughout the economic cycle?

Do you think homeowners and investors may be slightly disillusioned in their "consumer confidence" due to the high headline gains?.. even though this may not be representative of gains in the price of their property? Would any flippers or people who know a lot about price indeces chime in? I am not expert on these, and don't understand how they would be able to make adjustments, if they even tried.. More details/observations below..

In 2009 & 2010, I saw a large proportion of sold homes that were in very poor physical condition (REO's etc) and not ready to be occupied, which appeared to be weighing heavily downward on price indeces. Now, I see a much bigger proportion of remodeled and move-in ready homes, which bring them back up. In my mind, this change in the "mix" of properties being sold in varying conditions - even though they are the same addresses that are being bought and sold - are making significant impacts on home-price indeces that do not truly reflect an overall increase in housing prices. People talk about the "mix" of sold homes at different price points, but not condition as much.. It appears that the portion of the increase in prices directly attributable to the hard and soft costs (materials, labor, time, capital, etc) of improving the property are the approximate amount that the indeces are being "inflated" relative to the circumstances of the average, non-rehabbing homeowner.

To demonstrate this, let's say I buy a beat-up rehab in an upward market for $200K, put in $75K in all costs, including capital costs, materials, labor, and sell it for $350K net proceeds. Of the $75K in gains, some was probably due to the increased marketability of the ready-to-move-in house due to my hard work and entrepreneurial spirit, and some of that was due to the improvement in the overall market over the 6 months it took in this hot, upward market.

Over that same period, the house next door sitting in the exact same condition with the same family in it has gone up from $300K to $330K, if they were to sell it. In this example, the "average" house went up by $30K, or 10% - while the index captured a whopping 150% increase in same-property sales on my flip, to add to the average of the price index. Yet, probably about $120K ($150K total gain - $30K in "market" gains) or 80% of the measured improvement was due to money sunk into that individual house to get that price, and some "entrepreneurial" profit for my hard work. The average homeowner is not getting those price increases in the index that are blasted by the media every day..There is no doubt that there has been some improvement in prices, but I just wonder how the average homeowner's house has gone up relative to the indeces..

It's been on my mind for a while.. Any thoughts appreciated..

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