Wednesday, March 11, 2009

Simple House Pricing Formula

There are lots of ways to try and figure whether housing prices are reasonable, and there will always be some fudge factor, but for a quick immediate comparison the following seems to work:

House Price ≤ 150xRe - 150xHA - 10xTp

Where Re is equivalent monthly rent, HA is any monthly fee associated with ownership (like a homeowner's association) and Tp is the annual property tax. If a 1 bed 1 bath apt rents for $700 /month then a 1 bed 1 bath condo w/$100/mo fee and $1k/yr taxes should cost no more than $80k. Of course, location is important, as well as amenities. For detached, single family houses, finding equivalent rental prices can be difficult in many places, so some figuring may be necessary to compare with apartment prices instead.

And really, this is just a starting point. If the economy doesn't pick up, then rental prices may start to slide, and hosing prices that seem a good deal now may prove bad bets.

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