Home Price Ceiling Fundamental is a “limiting” fundamental in that if prices have busted through the Ceiling the other factors that would normally influence home prices have much less relevance. Once prices have fallen beneath the Ceiling, factors including job growth, population trends, economic conditions, and supply and demand resume their influence on the direction of prices.
I. Recent Sales - Comparable Market Analysis
Comparable Market Analysis or CMA is a commonly used methodology in the real estate business to ascertain a property's current market value. By looking at what others recently paid for comparable properties, sellers and buyers get an idea of current market value.
The major limitation of Comparable Market Analysis is that is looks backwards at yesterday’s transactions to establish current values and doesn’t offer insights to what next year’s prices might be. Just because someone paid X for the property last week, doesn’t mean buyers will be willing to pay X next year. If you’re in a falling market, better to look ahead to what prices might be.
II. Futures Market - S & P Case Schiller Housing Index
S & P Case Schiller indices measure the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan areas across the United States.
Housing futures contracts and options based on these indices are traded on the Chicago Mercantile Exchange. If you happen to be in one of the 20 metro areas covered by the index, you can compare the values of a specific quarter in 2008 to values fours years into the future up until the year 2012.
An argument for the relevance of these indices is that someone has put their money where their belief is and taken a position on the future price of housing in a specific market at a specific point in time.
For example, investors are betting that Las Vegas prices will fall an additional 22% by November 2009. Investors expect to see Miami down another 21.6% by November 09.
III. New Housing Supply - Home Price Replacement Cost Fundamental™
Looking at new housing in the pipeline is an excellent method to get an idea of where prices are headed in the next 6-24 months.
In 2008 building materials and labor costs have fallen 15-20% from their 2005 levels. Land values in some areas are down 30-80% from 2005 levels. In high cost areas like California, land comprises as much as 70% of the total cost of a house, so when land prices fall it can add downward pressure on existing home values as new homes coming to market have a lower cost basis.
Builders Can Build and Sell Houses at Prices 20-50% Less Than 2005
In many areas, builders today can build and sell houses to consumers at prices 20-50% off of 2005 levels and do so making a satisfactory profit.
The Home Price Replacement Fundamental™ enables you to separate land values from the costs of a housing structure. By separating land costs from the costs of a structure you can do better more accurate comparisons and forecasts.
To learn more go to the Home Price Replacement Cost Fundamental™