Wednesday, November 7, 2007

What does regression to the mean mean for Phoenix Real Estate?

Earlier this week I wrote an article with a nice graph showing the trends in Peoria. But then I started thinking about something I read earlier this year comparing our market's meteoric rise and subsequent fall with a statistical regression to the mean. (I can't remember who wrote it, and 20 minutes of searching hasn't helped – If you wrote the piece I'm talking about and are reading this, please comment or send me your link so I can give you credit!)

Looking at this graph, we can see that the average Price per Square Foot ($/sqft) in Peoria on 1/1/2004 was $104. If we accept that the long-term, historical average for real estate appreciation in Phoenix is 5% per year, then we would have expected the $/sqft to be $126.41 on 1/1/2008. ($104 * (1.05^4)).. 5% per year for 4 years. And we would expect the $/sqft to be $132.73 on 1/1/2009.

We can see from the graph that the $/sqft in October was $144. Therefore, if prices decline by another 8% over the next 14 months (or decline further over less time), we will have regressed to the mean. Everyone who owned their homes prior to 2004 can look at the whole boom and bust as much ado about nothing, since their homes would be worth the same as if none of it had occurred.

This could be good news heading into 2009.

What scares me is that things seldom regress exactly to the mean and then begin trending exactly with the mean. It is very likely that we could see a drop below the mean before the market begins to tighten. If this is the case, then we're back to where we started; no one knows exactly when or where the bottom is.

This could be good news heading into 2010 or 2011. If the market's appreciation rate drops below the mean, it will then have that much more "catching up" to do later, giving us either higher-than-average appreciation rates or giving us a longer-than-average upward trend.

What does this all mean? Not too much.

If you're planning on moving locally, be prepared to get less than you expect for your home, and to buy your next home "on the cheap." If you're moving out of state, this is a tough time to sell; think about whether you can postpone your move or what you're willing to accept in terms of a price for your home. And if you're considering buying here, either as a first-time buyer or moving from another state, this is as good a time to buy as we've ever had! Think about what you're trying to accomplish, what's your timeline, and gather good information. Then make the decision that's right for you.

Your hoping not to regress too much Realtor,

Chris Butterworth

[tags] Peoria real estate; market analysis; real estate forecast; regression, Fletcher Heights [/tags]