What is the value of property?

Last post I discussed the difference between price and value. As I wrote, price is what someone will pay for a good right now, but value is a calculation of the goods underlying assets. One example of this might be an old car. You may have a car that is a piece of crap and doesn't run. Try selling that on craigslist and see what sort of offers you get. But if the right buyer comes along, he may look at your piece of crap car that doesn't run, and he may see parts that can be salvaged and sold, and therefore make you an offer on the car.

So how does one discover the value of property? I already mentioned that comps are no good, they are reflections of price, not value. And appraisals are notoriously flexible. Besides, we don't want to base our views on what other people think. If you look for "bargains" using other people's yardsticks, you'll find a crowd with the same yardsticks looking wherever you do.

For a quick disclaimer, value does have something similar to price, in that everyone has their own views. Some value investors, when looking at stocks, may think that the loan/asset ratio is the most important yardstick. Others will swear by earning growth. Some even look at employee turnover as a crucial factor. The indicators that I look at are by no means comprehensive, nor are they guarantees. But they are what I look at.

The most important thing to remember is that real estate is local. National trends and charts are great, but what's happening in Michigan doesn't necessarily have anything to do with what's going on in California. So the first measurement we need to take is of the local economy.

Layman's terms: If the local economy is going in the tank, houses in the area are probably collapsing with them. If the local economy is booming and lots of new money is coming in, houses are probably climbing in price.

One of the first measurements to take of the economy would be the population growth. Housing, of course is a market, and therefore the more people coming into the market the higher the demand is. And demand is good when we intend to be a supplier. So we want to see what the population is doing. Let's compare two locations, Orange County, CA and Fairfax, VA.

We can grab our population number from a variety of locations, including the census website, the wikipedia and even county government websites.

Here we can see that the OC is growing at about 0.5% a year lately, while Fairfax is growing at about 1.5%. But looking at longer trends, Orange county has definitely been growing at a quicker rate. Meanwhile the US has been growing at about just under 1% a year. It seems safe to say that both Fairfax and Orange are growing at faster rates than the US in general (though OC is in a bit of a slump).

The next thing to look at is the building trends in the area. Fairfax's number of people per housing unit has remained relatively steady through the years, from 2.77 in 1980 to 2.70 in 1990 back to 2.71 in 2005. This is a good indicator that the area is not over-built, and probably still has a healthy number of houses.

Orange County's numbers are quite healthy. The population has been rising faster than new housing units are built. In 1990 there were 2.89 people per housing unit. In 2000 there were 2.93 people per housing unit, and in 2005 there were 3.00 people per housing unit. This indicates a healthy growth in population without too much of a boom of building.

An important note here is that with the recent housing boom, looking up numbers from 2005 probably aren't enough. But since I have a life aside from real estate, I'll leave finding the latest numbers up to you.

So far I think e can agree the the population numbers for both Orange County and Fairfax are healthy. Next post we'll look at the next major indicator, salaries (people have to pay for those houses somehow).