Regression To The Mean

Lets follow the sales progression of a home in southeast Orlando and see what information we can derive from the marketplace.
In May of 1999, after 199 days on the market, this @2000 square foot home in the Southchase area of Orlando sold for $123,000. This 4 bedroom, 2 bath home, the subject of this case study, was built in 1996, features volume ceilings, interior laundry, a covered rear porch and is located on a corner lot.
Our subject property sold again in September of 2002 for $160,400 after only 17 days on the market. The sale price was approximately 8% above our projected path of appreciation.
In 2005, with the escalation of housing prices in full gear, our subject sold in June for consideration of $269,900, full asking price, after only 7 days on the market.

After some interior renovations and a couple of buckets of paint, our subject was re-listed in August of 2005 and sold after 49 days on the market for $317,500. Now that is impressive! This value is some 70% above the projected appreciation schedule, which is obviously quite risk sensitive and in my view would be cause for concern if I was a buyer.

In Central Florida, the typical annual appreciation level for single family residences in decent areas has been approximately 6.5% over the last decade and half or so. The following shows a 6.5% annual appreciation of our subject based off the 1999 sale price:

1999---$123,000
2000---$130,995
2001---$139,509
2002---$148,578
2003---$158,235
2004---$168,521
2005---$179,475
2006---$191,140
2007---$203,564
2008---$216,796
2009---$230,888

We note that the 2002 sale was outpacing the projected annual appreciation rate by approximately 8%, which is not alarming in a fast growing community such as Southchase.

Evaluations of market price in the housing market has many of the characteristics found in the stock market. Risk is measured by the distance from the moving average, and the first 2005 sale is at a level some 45% above the projected appreciation, which clearly would indicate a substantial level of risk. Prices could "correct" back to the projected appreciation level without violating the trend of the market.

The second sale in 2005, even with the improvements to the property, signals what technical analysis would define as a "blow off top", which is a sudden sharp rally, an explosion to the upside which occurs after a long advance. This event usually signals the total exhaustion of buyers who have used up all their buying power and leads to a sharp decline in values typically back to or slightly below the moving average levels. It is then followed by a prolonged bear market, which we are presently experiencing.

In November of 2008, I was asked to perform an appraisal assignment on this property. The indicated value came in at $215,000, which incidentally, is right on top of the indicated value the subject property should represent in 2008 following the projected path of appreciation.

Below is a chart of the median sales price of homes in data through December 2008 from The Orlando Regional Realtor Association, of which I am a member. The escalation of value above the average appreciation path beginning in 2004 is clearly evident, and that is a measurement of risk. The chart shows us how pricing has now regressed to a level that is on par or slightly below the projected path.

What does it mean? In a normal environment, the downside risk of purchasing a home today is at normal levels, and that any significant deterioration from here would be abnormal and unprecedented. The affordability factor is in the buyers favor, and with the movement by the Federal Reserve injecting capital into the system, even with the lagging indicator of job losses mounting, we should begin to see an improved market by mid 2009. What are your thoughts?