Say there is a neighborhood of 200 homes. It’s an average neighborhood with an average sales price in the $320K range. There’s a slight variance in price for condition, but the homes were built as a development and are otherwise fairly consistent in size and amenities. Approximately seven percent of the homes sell every year, or fourteen homes, and it is from that activity that researchers and government types pull their average prices.
Now, say there is a significant demand for new construction in this older neighborhood, and a contractor is willing to risk purchasing a handful of dilapidated buildings to develop a new subdivision of fourteen homesites. People who can afford the price of new construction, which in this case pencils in around a million, can overcome the objection of living in a modest neighborhood in return for all the latest interior amenities and the centrality the neighborhood offers.
Of the seven percent of homes that sell the following year, three are $1,000K homes, and eleven are $320K homes. Now, the average home sales price for this neighborhood jumps to $465K! People panic.
Yet the bulk of the neighborhood has not changed at all. It is still primarily a modest neighborhood priced within reach of an average buyer. For this reason, real estate analysis needs to be local and always with the perspective of what groups are involved.
Home Economics 