Home Value Predictor

Seven False Assumptions – That Caused the Housing Crisis
False Assumption 1: Real Estate Has Always Gone Up in Value, Thus It Will Continue to Go Up in Value

Real estate prices in the United States have historically been on an upward trend, rising on average 1.6 percent in real terms between 1970 and 2005. However, this does not mean that prices increased every year in that period and by the same percentage in all locations within the country. For instance, between 1990 and 1995, inflation-adjusted prices of homes in the United States declined by 1.1 percent. If any individual purchased a house for residence or investment in that period and sold it before the market recovered, he or she may have realized a capital loss on that property because prices declined.

Moreover, the claim that real estate has always gone up in value, and thus it will continue to do so is a generalization that may not necessarily apply to specific localities. Real estate markets are local markets, in which any market’s stability and growth are affected by location-specific factors that influence supply and demand and therefore home values. Consider, for instance, the recent spurt in foreclosures, which has had a disproportionately heavy toll on real estate markets in, say, California and Nevada. An increased supply of distressed properties in those markets lead to large drops in home prices. However, foreclosure activity within each state may be concentrated in specific local communities, such as the Silicon Valley in California, which has seen a surge in unemployment.

Furthermore, there are over 1,200 Census Block Groups or hyper local markets in Silicon Valley. Income ranges from under $20,000 to over $400,000, prices range from under $100,000 to over $2,000,000, and the number of Short Sales ranges from near zero, to over 20% for some Census Block Groups. In addition, the medians are not correlated to the ranges, and the medians have changed over 8% since the yearly data was published by the free vendors that many sources quote.

Thus, any such local markets, including that in the Silicon Valley, CA, may have seen larger declines in home values than the state of California as a whole. Besides, these precipitous declines in California or Nevada may be taking place against home price increases in other parts of the United States. One example is Cambridge, MA, which recorded a 16 per cent annual increase in prices last year.

The Home Value Predictor™ ™ integrates various local market data into a model that forecasts price movements down to the level of a particular local community. Its broad and block-level market forecasts thus help avoid making investment decisions based on generalizations about real estate prices for the nation as a whole or for any particular local market.

Launching this month, I hope…
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