How to Determine Price Change as a Percentage
We here on the news or overhear from a real estate agent that "prices are up (or down) by some percent this year so it's "a great time to buy" or some other use of the percent change as it relates to some real estate statistic. What does it mean? How is that computed? Does it matter to me what happens to prices nationally when I want to buy a home in Atlanta or some other area?
If you are an agent and you work with clients, you can probably find some article that states these changes for you to quote. However, the real power of using percent change with your clients is when you are able to whip up these statistics in a much more meaningful way. If you are a buyer or seller, you better have an agent who knows how to whip these statistics up for you because it really doesn't matter what is happening overall in Atlanta or even in one of the suburbs like Alpharetta. They need to be able to tell you what is happening to comparable properties. That's where it really matters and those statistics are too in the weeds to find quoted my our professional organizations or even by local media. In any event, here is how you do it and why it is so powerful.
If you are a buyer or agent representing a buyer (works the same for sellers too) and you want to place an offer or list a home and one sold right down the street exactly the same as this one but it sold three months ago, how do you come up with a price for the home? Are prices rising or falling? By how much? Don't worry, it's not that hard to figure out. You just need to remember one simple phrase:
[New (Price) - Old (Price)] Divided by Old(Price) = Change
A little easier: new minus old divided by old
Let's take an example...
In some area, the average price for homes in June of last year was $325,000. This year in June, the average price is $347,000.
How much of an increase is this stated as a percentage?
New ($347,000) minus old ($325,000) and then divided by the old ($325,000) price
$347,000 - $325,000 = $22,000 divided by $325,000 = .0676
Move the decimal to the right two places to show as a percent and you have a 6.76% increase in annual price increase. I suppose 6.8% or maybe even 7% increase is acceptable but that depends on if you represent the buyer or seller :)
In our example above, we have to now figure out how much more this home is worth 3 months later not one year later so there is an additional step.
The easy way to do this is to simply divide the $22,000 change by 4 (there are 4 three month segments in a year) so $5,500.
The home, all else being equal, is now going to be worth $347,000 + $5,500 = $352,500
Aha - Now I Know Why it's a Great Time to Buy - NOW!
If you wait until next summer, that same home is going to be worth $369,000 and that's if prices only keep rising at 6.8% and we all know prices are going to start rising even faster. Buying now gives you built in equity that you won't have next year of AT LEAST $22,000! Wouldn't you like to have $22,000 extra dollars (spoken like a true real estate agent)???
This really is quite a simple equation that offers a great deal of power and leverage to your negotiating position. It also has other uses.
As a true real estate professional, we can use this same equation to determine demand and then compare it to supply. This one equation can be used along with absorption rates to generate a quite accurate snapshot of the current market conditions and then used to relate to past and reasonably predictable future conditions.
Homes sold (now) - Homes sold (last year, same time period) divided by (homes sold last year) = change
Ex: 72 now - 63 last = 9. Now divide. 9/63 = 14.3% increase in demand
If you are a real estate agent, you need to commit this one to memory and start using it immediately. Use it to keep consumers informed about the local market where you specialize.
If you are an consumer, you need to know this information to help you negotiate the best deal. The agent who has some simple real estate math on their side is going to be able to articulate a position that is repeatable and provable that can lay a strong foundation for sticking to a price or at the very least, giving you a tight price range to help ensure you don't overpay (if you are a buyer) or get your price (if you are a seller).
This is a great post, Ryan, well done.
It is also part of the conversation of how much house prices that are comparable to prospects and client's current, or next move, property in which area. This is something that we have to educate our customers and prospects about constantly in our area.
I have found that prospects accuse me of 'blinding them with science', or trying to foretell the future when I have tried this. Very good points, here, though. Thanks for posting.
I never thought of it that way, and I always use the traditional "home prices are on the rise, the time to buy is now!" or "the market just peaked up, if your thinking about selling lets list it soon!" and I never really check the actual numbers I was giving out myself, I relied on REALTOR.com or some other statistics that I found from reasonable trustworthy sources. This is a great post, very informative!
this is a fabulous post. I will take what I have learned and apply it to our Maui Real Estate market.
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