Housing market calculations

Housing market calculations.

In 2008, there was a housing market collapse in US due to sub prime lending. This collapse resulted into a global recession and credit crunch.Many developed countries started to bail out lots of banks,insurance companies,wall street companies by providing capital.

I was in US during this collapse and witnessed the direct impact on people. After 2008, things started to improve and markets started to gain confidence. By 2012, things are looking stable and i see lots of people buying houses. And people in media are also saying housing markets are improving. i noticed in my personal group of friends, at least 15 of them, bought houses in a very short period of time. It was a like collective buying, collective house warming and celebration. I was also tempted to buy a house of my own. But i did not dare to do it, as i know my limitations and constraints.

But this made me to think, in a total different direction. How will you calculate a value of house before buying it ? Does anybody has a formula to calculate? Most often it is the banks and the housing market agency decide the price. which you do not know, how they arrive at that price. Some people just say it is market driven. What is market driven? isn't the people who decide the market value. So after thinking for awhile, i came up with a formula which i have not tested in a real life conditions. I could be wrong. but i promise you it is interesting one. please go through the below explanation and let me know what am i missing.

Assume a city/county/place has the following
1. Total number of houses  = 10,000

2. Average area per house in sq feet = 1,000

⇒ Total area of all houses combined will be = (10,000) * (1,000) = 10 Million Sq Feet

Now, Lets assume

3. Total number of people = 20,000

4. Unemployment rate = 10%

⇒ Total number of employed people = 18,000

Lets say

5. Average income per annum of above employed people be = 35,000

6. Average savings per month be = 2,000

⇒ Total saving of all people = (18,000) * (2,000) = 36 Million

⇒ Total savings for 25 years because Bank loans are usually for 25 years

⇒ (36 M) * 25 * 12 = 10800 Million

⇒ Average cost of house per sq feet = (10800 M) / (10 M) = 1080
⇒ A house of 1000 sq feet = 1080 * 1000 = 10,80,000
Note: Above numbers are all fictitious numbers. but if you put real values you should be able to determine the actual market rate. And i have not taken inflation parameter in above equation.
Important Notes -

If you increase the number of houses and number of people, surprisingly you see a square feet rate for a houses is a constant.

If you increase the income and saving potential of the people the housing rates will increase exponentially and when the income drops housing rates decreases exponentially!!.

To all my blog readers, i cannot wait to get your inputs on above formula.