If you’re not using statistical analysis to identify trends, well, you should be. Speculate all you like about what’s going on in the market but the bottom line is mathematics. I remember one teacher stating that statistics was developed to evaluate probabilities within the gambling industry. No surprise there. In case you weren’t aware of it, the dealer always wins. Rest assured that those huge boats lining the Mississippi Gulf Coast weren’t built from people winning at the Blackjack table. The odds (probabilities) favor the house. But I digress.
The fact is, if you’re putting your hard earned dollars to work by investing in real estate, you want probability on your side. And the only way to really know if probability is on your side is by subjecting the data to statistical analysis. Out of curiosity I created a scatter graph of vacant land sales in Louisville, KY, to see what trends may appear. Here is the result:
Surprised? I was.You may notice the slight downward trend from the end of 2006 to the middle of 2008. From there, the slope trends upwards. Granted, I didn’t have the time to verify these land sales in order to weed out outliers or non-arms-length transactions but the trend line that best fits the available data indicates an upward trend for the value of vacant land in Louisville, KY.
You may be thinking, “Well, that’s all fine and good. But how can I actually use that data?” Obviously, the trend line is near $200,000 per acre throughout 2008 and has just ascended above $300,000 in 2013. But how can I know exactly what the dollar figure is for any given date along that line? That kind of information is helpful to us appraisers when making a market conditions adjustment, for example. In answer to that question, I’ll ask another one. See that equation at the top right-hand corner of the chart? That’s the key.
In our example, we are correlating dates with prices. Substituting a specific date for the x variable in our trend line equation allows one to project a specific price for a specific date along that line. It also allows one to project into the future or the past, assuming the trend line is relatively stable. If you’d like to learn more, call me or shoot me an email.