What it means
Measuring house price growth is harder than it sounds. Homes differ in size, condition and location, so the average price of homes sold this year may rise or fall simply because a different mix of homes was sold.
The repeat sales method solves this by looking only at homes that have sold at least twice and measuring how the price changed between the two sales. For each property, an analyst records the first and second sale prices and the dates.
The gain between the two sales shows how much that one property appreciated. Combining thousands of such pairs, usually with a statistical technique, produces an index that shows market movements from period to period.
Several well-known house price indices use this approach, which is popular because it only needs sale prices and dates. It does not require detailed information on each property.
Lenders, investors and economists use the resulting indices to track market trends, to value property portfolios and to monitor risks in mortgage lending. The method has weaknesses.
It uses only properties that have sold more than once, which may not represent the whole market, and it can be thrown off by homes that were renovated or deteriorated between sales. Properties that sell often may also be different from those that rarely change hands.
Finance teams that hold property or lend against it should treat repeat sales indices as a guide to the general direction of the market and not as a valuation of any single building. The index tells you what happened to prices in an area, while a proper valuation looks at the particular property.
The statistical work behind a published index is more involved than the simple example below. Methods usually give less weight to pairs of sales that are far apart in time, because a house is more likely to have changed in the meantime.
They may also exclude transactions between family members or forced sales, so that the index reflects ordinary market prices.
In practice
Real-world examples.
Example
A mortgage lender wants to know how much house prices have changed in a city since it approved a set of loans. It uses a repeat sales index for the area and adjusts the original property values. This helps it estimate current loan-to-value ratios without revaluing every home.
Example
An economist at a central bank tracks a monthly repeat sales index to see whether the housing market is overheating. The index rises 12% over a year, which is faster than incomes. She flags the trend in a report on financial stability.
Example
A real estate investment trust revalues its portfolio of rental homes at the end of the quarter. It applies the regional repeat sales indices to the purchase prices of each property as a first estimate. The valuation team then checks the largest properties individually.
Formula
Calculation
Total price change = Second sale price / First sale price - 1
Annualised growth = (Second sale price / First sale price)^(1 / Years between sales) - 1
Suppose a house was bought for $300,000 and sold two years later for $363,000. Price ratio = 363,000 / 300,000 = 1.21, so the total change is 21%. Annualised growth = 1.21^(1/2) - 1 = 1.10 - 1 = 10% a year, since 1.10 x 1.10 = 1.21.Case study
Seen in the real world.
Harborview Mortgage Services is an illustrative, fictional lender that held 5,000 mortgages on homes in a coastal region. The risk team wanted to estimate its exposure after a sharp fall in local prices.
They used a repeat sales index for the region, which showed prices had fallen 18% since the loans were made. Applying this to each loan, they found that about 600 loans now had balances above the estimated value of the homes.
The lender contacted those borrowers early and offered help with payment plans, reducing later losses. The illustrative lesson was that an index based on repeat sales gave a fast, portfolio-wide picture that individual valuations could not provide.
Watch out
Common mistakes.
- Using a repeat sales index as a precise value for one property, when it measures the average movement of many properties.
- Forgetting that homes sold only once are excluded, so the index may not represent the entire market.
- Ignoring renovations or deterioration between sales, which can make a single price gain look better or worse than the market.
Questions
People also ask.
How does the repeat sales method differ from a median price?
A median price compares different homes each period, so the mix of homes can distort it, while repeat sales follow the same homes.
Why use annualised growth?
It converts a gain over several years into a yearly rate, which makes sales with different holding periods comparable.
Where is the method used?
It is used by house price indices, lenders, central banks and investors who want a consistent view of price movements over time.
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