I was told that apartment prices have dropped 20 percent in the area where I am looking to buy. There is a unit that I like which just went on the market; since a similar unit sold for $1,000,000 last year, I should be able to get the one I want for $800,000, right?
A: I hate to talk myself out of a job by sharing all the Realtor secrets, but you're only half right. The pricing exercise that you did was to look at comparable units (or, in industry jargon "comps"). You took a look at what had sold, applied the discount factor of the overall market, and generated a target price. And you did that perfectly as an exercise in using comparables that had been sold. (I'm sure it's not going to blow you away to hear that we call those "sold comps.") The wrinkle is, sold comps are only half the game. In a flat market, it's fine to use them and them alone; but in a market that is going up or down -- well, it's aged news as the Daily Show would say.
In a more volatile market, you also want to look at on-market comps. This means that you want to look around and see what's selling in your price range. The way to check out the purchasing power of your dollars is to see what alternative buys you can make. For example, if sold comps imply that the unit that you like is worth $800,000, but there's another unit that you like on the market for $800,000 with an extra bedroom, then paying $800,000 for the first property would actually be overpaying.
You can run both sets of comps from the other direction, too: If you see a lot of properties that meet your needs and cost $600,000, and then you find a "bargain" one for $550,000, you still want to check to make sure that something similar didn't sell for $450,000 a year ago.
This safety check going from on-market comps to sold comps is exactly what banks are supposed to do with appraisals, to make sure that they're not lending money to buyers who are caught up in a market of deluded sellers. As you know from reading the newspapers, sometimes the bank throws all the comps out the window -- at their peril!
Anyway, I'm sorry I've given you one more set of numbers to play with -- but you're making a major investment, so even though you've got your eye on a target property, shop around.