Last week I wrote a post (A Positive Article About Real Estate) in which, among other things, I argue that real estate prices in Phoenix have adjusted down adequately so that they are not only appealing to buyers but are arguably a fair deal now.
Based on the the premise I used in that post I’d like to now give a real world example that supports the argument. The subject of this “real world” example is my own Crystal Point high rise condo located in midtown Phoenix, Arizona.
In September 2004, I purchased a very dated 2334 square foot, 2 bed, 2 bath, condominium in a high rise condominium tower built in 1990. The price was $375,000. Over the next year and a half I watched prices in Crystal Point and other high rise condo buildings sky rocket to the point that by early 2006 a similar home, albeit with nicer finishes and better views but an identical floor plan, sold for $700,000. At the time, I thought that my condo would be worth the same within 6 months. Little did I know that we were already hitting the proverbial wall.
Since then, I have watched as prices in our condo tower have slowly but steadily dropped. Today, I believe that my home would garner no more than $550,000 at best and probably much closer to $500,000 (assuming I could even find a buyer today). I came up with this opinion prior to coming up with the formula I discuss in the blog post using the more traditional approach of looking at comps, measuring the absorption, and normal real estate agent observation. Please know that now only am I super familiar with Crystal Point (having done more transactions in the building over the last 11 years than any other agent in Phoenix) but my main real estate practice focuses on the Phoenix high rise condo market/niche so I believe that I have a very good understanding of value in today’s market.
OK, now to approach the value in a different way using the argument I made in the previous post. As I stated I bought the property in September 2004 for $375,000. If I ignore the real estate boom and apply the formula I discussed previously then I would add 7% appreciation every year (compounded) to the $375,000 price for a period of 3.75 years to get a price today. So…375,000 + 7% = 401,250 / $401,250 + 7% = 429,337 / $429,337 + 7% = $459,390 / $459,390 + 5.25% (9 months) = $483,508. So, my opinion of value of $500,000 is super close to the $483,508 that I derive from using my formula of removing the boom and building in normal appreciation.
Now, before you all punish me for my method please know that I recognize that it is far from perfect (I was NOT a math major or statician in college 
. However, I don’t know of anyone who has offered a true analysis of value that makes any more sense than my position. Most people today measure a “good deal” by how much lower they got it than the last person paid OR by how much they negotiated off the list price. Neither of these “methods” hold any water in my book. At least my method “makes sense” (at least a little) and is defendable. Having said that…blast away. I’d love to get other peoples’ opinions.
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