It’s hard to know what to believe anymore. You see all the “For Sale” signs, you hear about rising interest rates, and rising inventory- but then you read that the median price continues to go up. If the market is really going down, how can that be?
Housingdoom has it’s own “Deepthroat”- a local realtor who is our insider in the real estate industry. Here’s his response when asked about median prices:
It’s seems the only argument still standing for the “soft landing ” crowd is the rising median prices. Most other arguments have been crushed by the overwhelming amount of empirical data (inventory levels, sales, etc).
How many times have you heard, ” We’re doing just fine. In fact, our median price just went up $5,000. It’s slowing down other places, but not here.” On face value they are right, median prices do suggest that pricing has leveled out, or is perhaps increasing slightly. To the home seller this is quite reassuring.
Nothing however, could be farther from the truth. For the uninitiated, here’s a quick primer:
The median price simply states that there are an equal number of sales above a given price as below. Median does NOT equal average price. In addition, median price does NOT account for the following:
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- The variance at which data points are above or below the median. (In other words, it won’t tell you if a $300,000 house is in between a range of $275,000 and $350,000; or between $100,000 and $500,000.)
- The actual size of the home.
- The quality or condition of the home.
- Amenities in the home.
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These factors are of utmost importance in determining a home’s value, but the median price model ignores them!
When looking at the median, you need to break it down and isolate some of the variables. A good example is a breakdown done by Ron Wilczek, a Gilbert area realtor. Here’s what Ron’s data looks like:
JULY ‘06 – 2,527 Homes for sale; 320 sold (12.7%); 7.9 months inventory
avg. 2,137 sf – (Median) price $366,497 – on market 82 days – price per-sq ft $172
JUNE ‘06 – 2,310 Homes for sale; 390 sold (16.9%); 5.9 months inventory
avg. 2,085 sf – (Median) price $364,317 – on market 76 days – price per-sq ft $175
MAY ‘06 – 2,269 Homes for sale; 346 sold (15.2%); 6.6 months inventory
avg. 2,070 sf – (Median) price $367,224 – on market 73 days - price per-sq ft $177
April ‘06 – 285 sold – avg. 2,033 sf – (Median) price $360,552 – on market 67 days – price per-sq ft $177
March ‘06 – 348 sold – avg. 2,043 sf – (Median) price $364,464 – on market 64 days – price per-sq ft $178
February ‘06 – 246 sold – avg. 2,035 sf – (Median) price $359,514 – on market 65 days - price per-sq ft $177
Note that as the median price went up, the price per square foot actually went down. How can this be? As you can also see from the table- the size of those homes being sold every month increased- hence the rising price of the median.
After reading Ron’s data, “soft landing” advocates may concede the fact that home “values” may not be going up as the median price indicates- but figure that at least values aren’t headed down. Wrong.- Dead wrong!
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Let’s take the next logical step and determine exactly what people are buying. There are about 30 subdivisions I track in the newer areas of the SE valley. However, I have several in particular that I track very closely (daily). I watch for inventory levels, the number of homes under contract, selling prices, price reductions, days on market, etc.. I also track the “Solds” to see what amenities are included now at a specific price.
Although the selling price may be the same as last year (price/SF), the homes selling now include MANY high $$ upgrades. Almost all of the homes sold now have most of these options- premium lots, pools/spas, upgraded appliances, upgraded flooring, etc. Bottom line- today you’ll pay the same cost/SF but you’ll get 50-70k in upgrades you had to “pay” for last year. This should not come as a surprise to anyone, as the days of investors buying anything with four walls are gone. The only people buying homes now actually want to live in them. (strange concept) People purchasing homes for their own use are much more likely to put additional upgrades in a home than an investor would. This is a trend being repeated in developments all across the Southeast Valley.
Confused???
Median prices stable. (For now)=True,
Cost/SF somewhat stable. (For now)=True
Value of my home going down. =True Who’s lying?? Well…….everybody… and….nobody. It just depends on which side of the fence you are on. Builders, Realtors, mortgage companies, etc. gladly point to the somewhat stable and meaningless median price. Informed buyers however, prefer to dig a bit deeper.The median prices will fall in the coming months- how long and how far is still open for debate. Unlike the stock market, where a company’s performance is almost instantaneously reflected in its stock price, the real estate market can take months -even years to adjust.
The median prices will fall in the coming months- how long and how far is still open for debate. Unlike the stock market, where a company’s performance is almost instantaneously reflected in its stock price,One of the vehicles that helped the market run up quickly though, may be the same thing that drives it down quickly- a good old fashioned Bidding War. This year though, it’s the SELLERS doing the bidding. Sellers are sometimes dropping prices almost daily just to keep up with their neighbors- trying to hook the ever more elusive Phoenix home buyer.
(Housingdoom would like to thank our local realtor for his insight. Debi AKA Twist)
Any average(mean, median or mode) will be affected by the date mix. In the current case if a housing sales slow down is, as expected, first disproportionately at the lower price end of the market, then both the median and mean can rise even as price declines occur across all price ranges. Its math, not markets. Unfortunately one of the local papers tends to use such date as a measure of “how much your home has appreciated”, compounding the error.
mike has a point, here in the NYC region we are seeing the same price phenomenon but higher inventories and longer DOM. FWIW, my brother in law had spoke to ASU housing institute muckity mucks and they said a reason for the spike in prices last year was several high priced developments came on line at the same time which can further distort the numbers. Also, if I was a buyer in say fall of 2005 and put an order in for a very expensive house with some serious earnest money I would be likely to stay committed to the sale.
Both good points…The most poignant indicator of the current market is inventory versus sales volume. Why would anyone believe that prices would actually INCREASE when the Inventory/Sales ratio is enormous – In fact far in excess of previous records. For relative prices to increase in the face of this condition would violate basic tenants of economics.
The other problem with median sales statistics is they only reflect what HAS sold. What ’s not reflected in these statistics is the overwhelming majority of sellers that continue to lower asking prices after months on the market. When these sellers are forced to take much lower offers you’ll start to see precipitous drops in median statistics.
Median Home Price is a formula that was appropriate when inventory levels were stable or on the decline. In this market, a more valuable formula would be be something like “Same Home Value”. When there is excess inventory, the inventory is “cherry picked”. He points out an obvious truth here. When you have selection, you will pick only the best, the most “bang for your buck”. These same homes demanded a only slight premiums in previous markets, because people looked at specs (i.e., sqaure footage, lot size, & comps), giving the 4-wall box greater value as a speculative equity. But, RIGHT NOW, it might take a 20 to 40% drop to coax someone into taking on a plain box as an investment, knowing that substancial upgrades will have to follow, along with greater competition and riskier DOM.
Excellent article and comments. For those that may be interested, the following is a link to a post on the same subject: http://voiceofsandiego.org/articles/2006/06/02/columnists/rich_toscano/96toscano.txt
An important point to emphasize, as mike mentions, is that some real estate professionals use the term “median sale price”, without using other supporting data, as if it were a meaningful indicator of the direction of real overall market value. An actual quote from a real estate columnist in a newspaper in my locality is as follows:
“Average sales prices continue to appreciate. The median sales price countywide was up 11% from a year ago.”
Sales are down and inventory is increasing in my locale, yet I believe the above type verbiage will convince some people into believing that the overall value of real estate in our area is still indisputably appreciating.
As long as we’re talking about misleading information from the Real Estate “Professionals” Check out:
this gross lie!
Is it possible that this guy actually believes what he’s writing? These guys are professionals alright…Professional Liars!! I’m sure there are plenty of agents who will “tell it like it is” but you know what they say about the barrel and one bad apple…
TM-
Thanks for the post- I don’t know why your comment got caught in the Spam filter- I just found it. My comments keep getting lost there too- my techies out of town- I’ll ask why when he’s back.
TM -
Great dig! I’ll feature it in the side-bar.
Great example today in sales reports for Zip 85215 (mesa az). Four sales this week:$225k,$280k,$1.95m,&$3.30m. Reported median equals $1.115m and last year four week average was $279k. Using the logic that median price changes equal appreciation I guess value went up about 400% in this area of Mesa, at least until next week!
Median sales price often rises when a market begins to turn. Quite often the lower end of the market drops out first which simply moves the midpoint of the market (median) to a higher number. This implies that the market is rising, when in reality, its simply a shift in the mix of what type of housing units are selling.
I just want to note, that the idea of getting the “pick of the litter”, (as I commented on previously here), is an important reason for maintaining median home prices in a dropping market, because the PRICE PER SQUARE FOOT is also stable. That nullifies the idea that just bigger houses are being bought. They are certainly, better houses, in better areas.
I know this because I’m an agent, and when I show three houses now, they see only the best. That is the attitude of any responsible agent. Of course, I will show them pictured listings of some of the “average” properties, but actually showing them is a waste, except for educational purposes. The “Plain Jane” homes are just out of play right now.
So what’s the value of the “Plain Jane” home? It would have to be significantly lower if the prime homes are being bought at the same median price as a “Plain Jane” was 12 months ago.
Matt-
Excellent point- anyone who is selling that is not among the best homes in their price range, is probably going to languish. That means if you can’t outshine the competition, you will have to drop the price until you do.