How To Look At Real Estate Values

Okay, I’m a nerd. For an example, please refer to the DCF analysis I ran on our duplex.


Not the view from our duplex, but it is just 30 minutes away!

And unlike elementary school where having a mind more prone to pattern analysis than understanding social dynamics was a definite drawback, as adults it’s actually served the PoPs pretty well, and has helped us make (what we feel were) very educated bets on the local real estate market.

Educated how? Well, the simple answer is that we looked for patterns in the local RE market and then for deviations from those patterns that we felt comfortable working within. Honestly, it sounds much more difficult than it really is.

The thing is, you don’t have to be a genius to do this kind of stuff. Yes, it might take a little time to pull the data together and think about it, but the rewards can be pretty significant, so maybe it’s worth a few minutes to read how we look at the RE market. Not to mention you get to see all my awesome graphs.


Commodities Are Easier To Value

What we’re going to talk about today is our duplex, which is very much a commodity. As a commodity, it is virtually interchangeable with any of the other two dozen duplexes like it on the block, and not all that different from the hundreds of others like it in the same neighborhood.

Commodities are a good starting place for analysis like this because you generally have access to a much wider data pool and don’t have to make big adjustments for size or quality. In this neighborhood, a duplex is a duplex is a duplex. There might be minor differences, but for the most part, these are all pretty similar. Other examples of commodities in RE investing would be:

  • condo units in the same building
  • cookie cutter type communities where the homes are all virtually the same
  • empty lots that are in comparable locations


Identify the Historical Market Trends

No one can say with certainty what will happen with an investment’s value in the future – or if they can, maybe they should join Raj Rajaratnam in prison. What we can talk about with some degree of certainty is what the value of a given commodity was in the past.

So the first thing that you should do when thinking about making a real estate investment is figure out what the values of similar properties were in the past. And by “the past” I’m not talking about one or two years. While stats sources like Trulia are okay for local markets, the best source is probably going to be your local public records database, most likely through the tax appraiser’s office. There you are going to find the most consistently applied market history.

We’re lucky – our local property appraiser provides over twenty years worth of market valuations for every home in our county on its website.  I don’t even have to put on pants to look these numbers up.  If your property appraiser doesn’t have such easily accessed online databases, call them.  As a taxpayer, remember, they work for you.  Chances are there is one person who is in charge of the market valuations for the geographic area you’re interested in, and they can probably email you the numbers you’re looking for.

To put together the graph below took three steps.

  1. I copied and pasted the market value history from our property appraiser’s site into Excel for all of the homes on the same block as our duplex. Each home got its own column and the years I copied were from 1992 – 2012.
  2. I computed the median market value on that street for each year. The Excel function is =median(CELL RANGE). See I told you this wasn’t genius-level stuff.
  3. Then I used the Excel “Line Graph” option to make this pretty graph.

Come on, we can all agree this is one gorgeous chart, right?

Sanity Check

The first ten years or so on this graph look pretty consistent. Prior to 2002 you see a relatively slow but steady increase in market value from year to year. In fact, if we look at the year-over-year percent changes in this time period, they average about 2.54%. Looking up the CPI (consumer price index, a measure of inflation), we can confirm that the average CPI in those years was 2.50%. So the market values were basically ticking along nicely with inflation. But then what happens after 2003? The red line looks like it starts to go haywire. Let’s think about two time periods in this graph.

First, let’s look at 2003 – 2007.

Were the values in this time period reasonable? Did something structurally change in the area that would give a reason for the values to be increasing so much more than inflation?

I know you guys probably don’t know our area in Florida, but the answer is pretty much “No”. The average income in the area didn’t increase dramatically, nor was there a 300% increase in population. Supply and demand were both increasing, and if anything, supply was outstripping the population increases as homes were being built and purchased without any immediate plans for occupancy.

Then what about 2008 – 2011?

Was the world ending? Why were the values so low? Did these numbers make sense either?

Again, even though our area did get hit hard with the recession (> 10% unemployment, etc), average incomes did not plummet, and the population stayed relatively stable. There were no huge structural differences in the local population between the late 1990’s and 2009.


What To Do Next? Add a Trendline.

With our sanity check, we determined that the years 1992 – 2001 were pretty stable and seem reasonable to project long-term values from. So what we want to do is add a trend line to our graph that takes that stable period of growth and projects it forward into the future so we could see what home values would have looked like if people hadn’t lost their minds growth had been steady over the intervening years.

To add a trendline in Excel, add a new line to graph that is just the years you want to trend from. In this case, 1992-2001. You can see this line in blue overlaying the previous red line. Then use the “linear” trendline option in Excel on your blue line. What this does is take the trend that happens from 1992-2001 and projects it forward. Now our graph looks even more impressive and all it took was a few clicks.

Even more colors. This is clearly the prettier graph.


What this trend line does is give us a good idea of where we think it’s reasonable for prices on this street to settle out when the market stops gyrating so drastically.  It also gives us a good place to reflect upon the PoP family purchases that were made in this area.

  • Mr. PoP’s parents bought their duplex (that Mr. PoP picked out!) in this neighborhood for $100K in 2008. We thought that was a good buy at the time, and still don’t think they overpaid when you consider long-term trends.
  • When we bought our duplex for $50K at the end of 2010, we felt that we had a lot of room for growth in value before getting back to the historical norms.

Today, we’re sitting on a valuation of about $100K. It’s still a little below the historical trends, but I’m reasonably confident that the market will start to normalize along basic inflationary trends sometime soon.  If it doesn’t, we know our “sell point” via DCF analysis, so if Mr (RE) Market wants to go crazy high again, that’s okay too.


Just a couple quick closing notes. Unlike Jay’s discussion over at The First Million Is The Hardest on exploiting the herd mentality, for us this wasn’t all about buying low and selling high. It’s about understanding the long term value proposition of an asset that we plan to hold for a very long time. Also, remember, this method works best for commodity type properties, though another time we’ll discuss how we can go about making adjustments if you’re looking in a neighborhood where the homes are more qualitatively different from one another.

If you’re considering investing in real estate, I highly encourage you to give analysis like this a shot. It’s actually much easier than all those pretty graphs make it look.


Did you (will you?) consider the long term value trends in your area before purchasing real estate? If your short term trends show increases that are significantly higher than CPI, have you done a sanity check to ask yourself why? Are there structural reasons that value growth in your area would be greater than inflation?

Does someone want to take me up on this? I’d love to help someone put together graphs of market values in prospective areas.

24 comments to How To Look At Real Estate Values

  • I used to look at trends in property, but with the GFC and the current state of the world (re chronic money printing) I don’t see historical trends helping too much in predicting future values.
    Glen @ Monster Piggy Bank recently posted..4 Tips for Sticking to Your BudgetMy Profile

    • Until we see inflation skyrocketing, I feel like this is a pretty conservative way to look at the market. I’d be very curious to see an analysis of neighborhoods that were around prior to the insane inflation rates of the early 80’s. This street wasn’t built out until the mid-80’s.

  • Your interesting graphs never fail to deliver! I feel like I learn more about real estate investing from you than I do from real estate investing blogs. The only question Ive got is, shouldn’t your trendline be exponential with a cpi average annual increase? Im sure you considered this. What are your thoughts?

    • Good point!

      Mostly I wanted to keep it easy and accessible in terms of the concepts and on this scale it doesn’t make a big difference. I just pulled up the spreadsheet and did an exponential trendline as well, and the eqn is 72634*exp(0.025*# yrs since 1992).

      In terms of how this shifts the trendline, it’s not much. Value for 2013 on the linear trend is 118K compared to 123K for exponential. Definitely still in the same ballpark even after 20+ years of compounding.

  • This is what we’re thinking about right now. We definitely want to buy a house that will go up. We are terrified of buying a house and then it becoming a ghost community in a few years! There are just so many pop-up communities where I live.
    Michelle recently posted..How To Pay for Graduate SchoolMy Profile

  • I think by performing your analysis and keeping a long-term focus you did exactly what I talked about in my post (thanks for the mention btw!).

    Everyone wanted to rush into real estate in that ’02-07 period and everyone would have told you it was a great buy. Not many people were singing the same song in 08-10 and now you get to reap the rewards for bucking the trend.

    I’m definitely interested to see the trends in my area, I’ll have to try my hand at putting together some graphs like you have!
    The First Million is the Hardest recently posted..What Is Your Retirement Scenario?My Profile

  • D5

    Yes, compulsive spreadsheet nerds unite! I’m fairly certain that it was at some point in college where being smart transitioned from a bad thing to a good thing (but I work in an engineering office so I MAY do have a rather skewed view of the world).

    I love the real-estate posts, they’re a big help to those of us still renting. Hopefully we’ll be able to fold all the advice into our future pursuit of a house.
    D5 recently posted..Delayed Gratification in ActionMy Profile

    • Haha, I think for me changing to a gifted program in school was when it became okay to be smart. Boy was that a relief! =)

      Glad you like the RE posts. We definitely get a kick out of real estate and it’s been a big part of our financial plans so far in our marriage.

  • PK

    So… you’re saying it’s magic? (I kid).

    Still, picking your ‘well behaved’ market is more art than science; it would be tough to fault you for adding 2002 or even 2003 to your trend. You’re probably also hurt a bit by the limited sample (I suppose you could take something like the Case-Shiller and build it back a few years).

    How do you think you’ve done since the purchase? I saw in the DCF article you said it appraised for higher than you expected.
    PK recently posted..Is Dave Ramsey’s Investment Advice Misguided?My Profile

    • Math = magic =)

      There may be a little bit of art, but I think it is largely science. The YOY increases of 2002 and 2003 were 6.9% and 10.0% respectively, so I’m not sure most people would have put them in after seeing the numbers. But either way, even if you do, the exponential trendline still only has the factor in the exponent as 0.03 instead of 0.025. So that means that by 2013, it’s modeling a $136K valuation over the $122K for exp with 0.025.

      As for using Case-Shiller, I actually think that there’s too much lost in looking at RE on that kind of scale. There are huge swaths of the country that Case Shiller doesn’t even consider. And even if you looked at just our county numbers, valuation trends are almost hyperlocal around here. The neighborhood where our house is bottomed a year earlier than the neighborhood where the duplex is.

      I think we’ve done pretty well on the duplex so far. We’re expecting one more year in the next two to have minimal cash flow as the roof and one more AC unit are nearing the ends of their usable lives, but then after all of those big capital expenditures are done (at least for the next 15-20 years!) we’re anticipating to have cash flow in the range of 10-12K per year on a pre-tax basis. As for the current market value, it’s sitting at about $100K, which is double what we bought it for. It’s still below our projected trend line, so there’s likely still some appreciation, but we’re in it for a long term cash flow hold.

  • This is very useful. If people had seen the trend and the jump in the market they may not have made the mistakes of buying when the prices were too high.
    We plan on purchasing a rental once our mortgage is paid off and I can definitely use this information when looking for a great deal. Thank you PoPs.
    Justin@TheFrugalPath recently posted..Can you use Coupons at the Dollar Tree? Yes!My Profile

    • Yeah…I would like to think that if a rational person saw the chart in ’05 they would have thought something was wrong and stayed out of the market. From what I remember of that time the thought process was “Holy crap, I have to get in now before it gets even more expensive and I’ll be a renter for the rest of my life!” And since we “knew” that the RE market only went up, lots of people lost everything. Good luck with purchasing the rental; there are some other analysis tools that you can use there too…stay tuned.
      Mr. Pop recently posted..How To Look At Real Estate ValuesMy Profile

  • You should charge for services as a consultant. If everyone looking at real estate planned as well as you did, there would be far fewer disasters.
    Kim@Eyesonthedollar recently posted..Paying Off Debt is Like a Winter BlizzardMy Profile

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  • Patrick

    Why did you use median and not mean in your graph calculation?

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