Home prices may be increasing but by how much? | PostIndependent.com

Home prices may be increasing but by how much?

People often ask what changes have occurred in their property value over the past few years. It seems like a simple issue and one that might be easily answered using a variety of data sources. The results, however, often differ dramatically depending on the source of information used. The most readily available and widely used sources of market data provide averages for the county taken as a whole, or by municipality. However, applying averages such as these to determine value or price changes for individual properties is problematic at best. Why? Because averages reflect the extremes and, by definition, a range of properties.

Think of it this way: If a person places one hand on a block of ice and the other on a hot stove, on average they are comfortable. If a golfer hooks one drive into the left rough and slices the next an equal distance into the right rough, on average, that person was right down the middle of the fairway. And yet, as these examples illustrate, the average itself is hardly an accurate reflection of the two extremes that helped create it. The same misconceptions can occur when using averages to assess area values or changes in property values from one year to the next. The greater the difference in value between the properties being used to produce the average, the less likely it is that any specific property within that group will be equal in value to that of the average.

Understanding these imperfections that are inherent with averages, consider the data shown. From 2003 to 2004, the change in average price for properties sold within all of Garfield County was a 34.45-percent increase. The total number of transactions that occurred in 2004 was nearly identical to the number closed in 2003. In order for the average to increase by such a dramatic amount, surely there had to be a substantial increase in overall values, right? Well, not necessarily.

To further illustrate the point, consider this example: Suppose that in 2003, all properties in Block 1 are worth exactly $200,000. During 2003, only homes in Block 2 sell. The average price of homes sold is, therefore, $200,000. In 2004, only homes in Block 2 sell and they are all worth $500,000 each. The average price of homes sold in 2004 is $500,000. No change in value occurred in either Block 1 or Block 2 from 2003 to 2004, yet the average price of homes sold in 2004 for the entire area was $500,000, an increase of 150 percent over the previous year!

The above example, while simplistic, demonstrates how the average price of sold properties can change without a corresponding change to the value of the properties themselves. This seemed very much the case in 2003 versus 2004 within Garfield County. In 2003, much of the real estate activity that occurred was in lot sales and entry-level homes creating a relatively low average sale price. In 2004, there was a notable increase in the sale of more-expensive properties. Taking the aggregate dollar value of sold properties in 2004 and dividing that number by the total number of sold units produces an average sale price 34 percent higher than that of a year earlier. And yet, as the assessor’s data of actual value shows, the greatest percentage increase in single family residential properties for any municipality within the county was only about 5 percent.

What does this mean to the owners of real estate or to potential buyers? Simply this: Each property is unique, and its true value is determined by what a willing and informed buyer and seller agree to, neither of whom is acting under duress. An estimate of value can be determined by a competent professional after considering a variety of factors such as market conditions and the recent sale of other properties with comparable features located in close proximity to that of the subject property. The value of any differences in features and amenities between the comparable properties and the subject property are adjusted accordingly to arrive at an accurate estimate of a property’s worth.

Owners considering the sale of their home or property should seek the services of a professional to help establish an accurate price and may need to temper expectations regarding increases in their property’s value when compared to overall market averages. Mispricing a property being offered for sale is one of the most common and costly mistakes that sellers make. Overpriced properties, if they sell at all, usually result in a longer selling time and deeply discounted offering prices. Statistics show a direct and adverse relationship between the length of time that a property is on the market and the percentage of asking price that the seller ultimately receives. More often than not, sellers are well served by establishing a listing price at or very near to a property’s true value.

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