This has been a very confusing year for the housing market. If you read much about how prices have changed in Charlotte over the past year, you will see the general consensus is we are in a tight market and prices are rising faster than they have in the past. While this is true, it’s very difficult to determine how much faster prices have actually risen.
We’ve found that many of these reports exaggerate the increase and create unnecessary concern for first time home buyers worried about buying at the top of an inflated market. While we do believe price increases in 2020 were near the top of the historical range, we do not believe they were significantly outside of the historical norm and therefore do not feel there is notable downside risk assuming the historical appreciation trend continues.
Many of the popular real estate websites provide information on how prices have changed. You can see Redfin shows a 16.2% increase in year over year sale price, while Zillow shows price appreciation of 9.9%. What is driving the gap and what is the real number?
One of the difficulties with calculating year over year price changes is that you have two things happening at the same time:
- The price of a specific house is increasing
- The types of houses being sold changes
It would be very easy to calculate price changes if the same houses were sold every year (123 Noname Ln sold in Jan 2019 for $300k and 123 Noname Ln sold in Jan 2020 for $330k), but this is rarely the case. Instead you can either take the average of ALL houses sold or try to find a way to calculate price changes for COMPARABLE houses.
Let’s look at the downside of looking at ALL houses. If we have a very simple housing market with 4 houses sold in 2019 (let’s say houses 1 & 2 sold for $300k and houses 3 & 4 sold for $200k), your average sale price is $250k.
Now let’s assume these same houses were sold in 2020 and appreciated by 10% (houses 1 & 2 sell for $330k and houses 3 & 4 sell for $220) our average sale price is $275k, which is exactly 10% higher than our 2019 price.
Let’s change our 2020 real estate market a bit and assume something happened and the person living in house #4 decides not to sell. Houses still appreciated by 10% (houses 1 & 2 sell for $330k and house 3 sells for $220), but now your average sale price is $293,333, which is 17.3% higher than 2019.
You can see when the types of homes being sold change, looking at the average price of ALL homes gives you a very inaccurate picture of the housing marketing. Normally this doesn’t have a significant impact because the types of homes being sold doesn’t change much year over year; however, 2020 was not a typical year.
Things like eviction moratoriums and job losses (largely concentrated in lower income occupations) caused a significant change in the types of homes sold in 2020. You can see this if you look at the number of properties sold in different zip codes.
- According to Redfin 1,536 homes were sold in Newell / Harrisburg (zip code 28215) in the past year vs. 1,758 the prior year (a ~13% decrease)
- In Pineville (zip code 28210), 1,144 homes were sold in the past year vs. 1,181 the prior year (a ~3% decrease)
- Meanwhile, the average prices increased similar amounts
- Newell / Harrisburg increased 6.7% to $240k
- Pineville increased 7.5% to $358k
- Assuming these were the only two zip codes in Charlotte, you can do the math and find that combining these would make it appear the total “Charlotte” price increase was 8.2%, which is higher than any individual house increased
This is the method Redfin uses (average sale price for ALL sold homes), which is why it is so high for 2020. In 2020, we saw a significant decrease in certain home types sold (most of which would have been sold at below average prices, bringing the average down had they been sold).
Let’s now look at how price changes when looking at comparable homes. Unfortunately, there is no easy way to do this. In the example above, we looked at how shifts in sale volume by zip code could impact the average price change, but location is just one of many factors that can influence this. Were more large homes sold in 2020 than 2019? Were less foreclosed homes sold in 2020? Were less homes on busy streets (typically lower priced) sold in 2020? There are many factors that need to be accounted for when trying to calculate the change in comparable homes.
We don’t know how Zillow calculates this, but it appears their price appreciation methodology does attempt to look at comparable homes, which is giving them a 9.9% appreciation estimate.
This question is particularly well suited for a Machine Learning algorithm to solve as it can automatically account for a variety of factors without our needing to define all potential changes in housing “types”. We leveraged our models to estimate year over year price appreciation and arrived at ~7%
In summary, it’s difficult to say exactly how much the price of a specific house increased in 2020; however, you do not need to be worried about “overpaying” if you decide to purchase a house soon. While the 2020 market was tight and housing prices did increase, the price increases were not significantly higher than the prior trend. For the past 7 years, annual housing price appreciation has averaged in the 5% – 7% range. If our estimates are correct, 2020 was in line with the top of that range.
If the Zillow estimates are correct, price appreciation was slightly above the historical range; however, assuming a continuation of the historical trend, even IF the market gave back the excess 3%, you would expect ’21 appreciation to more than offset this.
If you want to get property specific insights on historic price appreciation, subscribe to our newsletter, where we can provide more detail at the property level.