What Is the Repeat-Sales Method?
The repeat-sales method is a manner of calculating changes in the sales price of the same piece of real estate within specific timeframes.
Housing market analysts use this relatively simple approach to estimate shifts in home prices over periods stretching from months to years. Various housing price indexes have adopted the repeat-sales method to provide information about the real estate market to homebuyers and sellers, property investors, and those working in the housing and housing finance industries.
- The repeat-sales method assesses how house valuations change over time by focusing on the different sale prices of the same piece of real estate.
- Various housing price indexes have adopted the repeat-sales method to eliminate the problem of accounting for price differences in homes with varying characteristics.
- The repeat-sales method isn't without flaws, restricting data to houses that have been sold more than twice during the sample period and overlooking the fact that the same property can change over time.
Understanding the Repeat-Sales Method
The housing market is considered to be one of the United States' leading economic indicators. The condition of the housing market and overall economy are interlocked in many ways. When real estate prices go up, homeowners grow in confidence and often loosen their purse strings, triggering a rise in consumer spending. Developers are also buoyed by signs of heightened demand, boosting gross domestic product (GDP) by investing more in new land, materials, and jobs to build new houses.
Housing price indexes are tasked with the important and tricky job of assessing real estate trends. The majority of them seek to achieve this by tracking valuations in a specific region over a certain period of time. Unfortunately, some of the calculations these indexes use can result in an inaccurate picture of housing price trends.
Flawed calculations include picking random samples of houses to track. These properties may not be for sale or their structures and types could be very different. An index which monitored the median home price in a specific area—such as the National Association of Realtors (NAR) Median Index or the Census Bureau Median Index—would not identify changes to the structure of homes versus outside market factors that may affect price.
The repeat-sales method entered the scene to overcome these structural issues. It was created to track the change in price of real estate between a current sale and any previous sale, helping to ensure that like is compared with like.
Advantages and Disadvantages of the Repeat-Sales Method
Repeat-sales methods calculate changes in home prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics. Repeat-sales methods also offer a more accurate alternative to regression analysis or to calculating average sales price by geographic area.
The concept of the repeat-sales method was first introduced by Martin Bailey, Richard Muth, and Hugh Nourse in 1963, and then modified by Karl Case and Robert Shiller in the late 1980s.
The repeat-sales method is by no means flawless, though. One of its main drawbacks is that it does not account for homes that were sold only once during the reported time period.
Another is that a property sold at two different times during a sample period might not necessarily be identical. The same home may have significantly deteriorated in condition or undergone big renovations, impacting its comparability.
Examples of the Repeat-Sales Method
Perhaps the most well-known housing index that relies on the repeat-sales method is the S&P CoreLogic Case-Shiller National Home Price Index. The Case-Shiller Index measures changes in the value of the U.S. residential housing market by tracking the purchase price and resale value of single-family homes that have undergone a minimum of two arms-length transactions.
The index does not factor in new construction, condos, and co-ops and also excludes non-arms-length transactions, such as home sales between family members at below-market prices.
Other indexes that use the repeat-sales method include the Federal Housing Finance Agency's (FHFA) monthly House Price Index (HPI), which is based on Fannie Mae and Freddie Mac's data on single-family home sale prices and refinance appraisals, and First American CoreLogic's LoanPerformance Home Price Index, which covers a broader geographic area than the Case-Shiller or FHFA indexes. Canada's major home price index, the National Composite House Price Index, also adopts the repeat-sales method.
Indexes such as these typically report changes in home prices from the previous month, quarter, and year. Increasing home prices indicate increasing demand, while decreasing prices signify decreasing demand.