A Beta Look: Mathematical Framework to Buying a Home

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Recently, my friend was interested in purchasing a home in Palo Alto. However, she was unsure what the offer price should be given the variance and competition. Out of curiosity, I decided to figure out what would be a fair offer price. Using data from Redfin, I did an analysis of the current market trend and recommended a bid price strategy for her.

I wanted to understand how the market is currently behaving. Since the home is close to the borderline between Palo Alto and Los Altos Hills, I gathered data from 2012 – 2016 for the larger Palo Alto and smaller Los Altos Hills homes. I looked at metrics such as average sale to list price percentage, percentage of homes sold above asking price, and the median days on market.

After analyzing the data, I concluded that competitiveness for homes have dropped since January 2016. The sales to list price percentage and percentage of homes sold above asking price have both decreased while the median days on market have increased. This indicates that the the housing market is starting to cool off and we should expect bids to be less competitive. To estimate a fair offer price for the home, I looked at where this home lies compared to others in regards to the average sale to list price.

The methodology includes creating a sale to list percentage hotness gradient, using Redfin’s views and favorites to approximate “hotness”, and calculating a sale to list percentage for this home. I looked at homes sold in the past three months in Palo Alto, Los Altos, and Los Altos Hills. I concluded that a very hot home is sold at 116% above listing price while a cold one lies at 95%. To estimate the hotness of 4192 Manuela Ave, I used Redfin’s views and favorites for homes priced in a similar range to compare. Based on the comparison, this home is considered relatively hot so it is expected to sell between 106% ($2.85M) – 112% ($3.0M) above listing price.
Since the housing market is starting the weaken, I recommend that $2.85M is a fair offer price with room to negotiate up to $3.0M. Any price point above $3.0M should be avoided as it would be too expensive.

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