How Time Affects Real Estate Prices

You’ve found your dream home and are working up a Comparative Market Analysis to see if it is priced properly. Due to the nature of inefficient markets in Real Estate, the only comparables you can find were sold over a year ago. How can you adjust for time?

Technically, you shouldn’t. Time does not affect real estate prices. Changes in market conditions, such as appreciation or depreciation in properties, inflation/deflation, changes in home buyer’s perceptions of the market environment and a host of other variables affect Real Estate. If market conditions have not changed, than no adjustment is necessary for a comparable purchased over a year ago. If a home was bought last month and the economic landscape has changed considerably, than an adjustment is warranted.

Difficulties arise in determining when the price of a comparable property was ultimately negotiated. Closing dates provide only a general indication as to the time and subsequent market conditions of negotiation since the date between acceptance and final closing can vary considerably (weeks to years). If the physical and economic characteristics of a property are held constant, than analyzing the sales of the same property can reflect changes in market conditions.

This is the premise under which constant quality house pricing indexes published by the S&P Case/Shiller and OFHEO HPI operate, albeit with a more sophisticated methodology. In your own analysis, investigating several sets of sales would be prudent. Care must be taken to ensure that transactions do not involve non-market conditions and are truly at arm’s length. Linear regression analysis and scatter diagrams can be useful in analyzing the annual rate of change in market conditions.

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