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Real estate pricing
Real estate pricing deals with
the valuation (finance) and there are three main methods:
appraisals with comparable properties, capitalization rate
comparisons with similar income producing properties, and
discounted present value of expected future cash flows.
After realty prices are estimated, recorded or otherwise
reported, there remain two major ways in which aggregate home
prices are reported: median and mean (average). Prices are also
calculated by square foot, using both the mean and median price.
Real estate prices have had a profound impact on urban, as well
as the suburban and rural landscape. The most important
government measurement of home prices in the United States is
the house price index. Median house prices are reported for
metro areas and regions of the country by the private National
Association of Realtors.
The median home price
The median home price is the threshold which divides
the real estate market into two equal halves, in reference to
pricing. One half of all homes in the market were sold at a
price above the median home price, while the other half were
sold below that price. For example, the median home price in the
United States was $213,900 in the fourth quarter of 2005,
meaning that half of all homes sold in the US were priced above
$213,900, and half were priced below $213,900. In California,
the median home price was $548,000.
The median home price is one of the most common measurements
used to compare real estate prices in different markets, areas,
and periods. It is said to be less biased than the average since
it is not as heavily influenced by the top 2% of homes sold. For
example, the average home sale price in the US was $264,000 in
October 2005, compared with a median home price of $213,900 for
the same time period.
mean home price
The mean home price, or average home price is the sum
of prices of all homes sold in a certain area in a certain
period, divided by the number of properties sold in the same
area in that period. For example, inside the hypothetical
Blackwoodwood Townhouse complex in Anytown, California, there
were five townhouses sold in March of 2006. The properties were
priced as follows: one for $450,000, one for $459,000, two for
$465,000, and one for $499,000. The sum of all of these
properties is $2,338,000. This number is then divided by five,
which equals $467,600. Thus, the mean home price for a townhouse
inside Willowood was $467,600 in March 2006.
In per square foot pricing, the total price or rent of a unit is
divided by the square footage of the unit.
Sales price per square foot
Sometimes real estate prices are measured by the price of
each square foot. This allows for a better comparison between
differently priced homes as well as homes of different sizes. In
this pricing measurement method, the median or mean price of a
home is divided by its square footage. For example, a 1,243 sq.
ft. home was for sale for $465,000. To find the per square foot
price, the price of $465,000 is divided by the square footage of
1,243. The result, $374.09, is the price per square foot for
this particular home.
To effectively compare neighborhoods, the mean or median home
price of a neighborhood is divided by the mean or median square
footage. To refer to our example of Willowood Townhomes in
Salinas, CA, the sold units in Willowood range from 1,243 sq.
ft. to 1,621 sq. ft. The first four units are each 1,243 sq.
ft.; the fifth unit is a little larger, measuring 1,621 sq. ft.
The square footage of all units combined is 6,593 sq. ft. This
number is divided by five, the number of homes for sale, and the
result, 1,318, is the mean square footage. The mean price for
the sold townhouses in Willowood of $467,600 is then divided by
the mean square footage of 1,318; the result is a mean price of
$354.78 per square foot. This also includes the lot the home is
built on (which varies in size).
In cities where condo's, co-op's & to some extent townhomes &
row houses are more prevelant, the prices do not include the
land, since that is not owned by the indiviual but the entire
association (though older town homes & row houses sometimes are
not part of associations). The size of city lots are generally
much smaller than those in the suburbs, measuring sometimes a
mere 20 feet wide for a 3 or 4 flat apartment building, with
little to no land left for vegetation.
Rent per square foot
Rent is also calculated by square foot. The rent per
square foot is often used as an effective tool in comparing
tenements and different markets, when units of different sizes.
For example, in March 2006, a given 1,600-square-foot
single-family home in Aptos, California charged a monthly rent
of $1,800. In order to find the rent per square foot, the rent
of $1,800 is divided by the square footage of 1,600, which gives
a rent per square foot of $1.12.
Another given 1,140-square-foot single-family home in Aptos, CA
had a rent of $1,595 per month. Again, the rent of $1,595 is
divided by the square footage of 1,140, which equals $1.40 per
square foot. So, even though this home has a lower overall rent,
its rent per square foot is actually higher than that of the
first home.
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