I like good news as much as anybody; but, as a real estate agent, I know that what appears to be good news can often mislead people who have to make decisions about selling their property. This particularly happens when it is reported that the median price has gone up. Everyone with a house to sell takes that to mean that their property is worth more than it was during the last reporting period. And if the median has been going up steadily for the past few months? Who knows? It may be boom times again! Frequently, however, such thinking is mistaken. Statistics that cite the median for the market in general – even if narrowed to a particular region – don't necessarily hold true for any particular price range within that market.
Let us recall what the median is. It is the midpoint. It is not the average. (I am not saying that the average is a better measure.) Consider a simple example: Suppose there have been widget sales at $100, $400, $600, $800, and $1,000. The median is $600. The average is $580. If the top sale were $3,000 rather than $1,000, the median would still be $600, whereas the average would now be $980. I do not argue for which is the better measuring stick; I just want to note the difference.
So what should we make of the news that the median price has been rising? Does it mean that "prices are going up"? Or what?
Many observers have noted that the rise in the median does not necessarily indicate a rise in prices in general. Rather, it is reflective of more activity at higher price ranges than had been experienced in the recent past. In many market areas, for the past year to year and-a-half the greatest activity – practically frenzy in some areas – has been at the bottom of the price ranges. This is not a surprise. Smaller condominiums and starter homes were generally what constituted the first wave of foreclosures on loans that never should have happened. More recently, though, the number of sales has increased in higher price ranges. As the effects of high unemployment and a staggering economy spread throughout the land, there are more sales – many of them distressed sales – of larger homes, ones that people expected to live in a long time.
While the increased sales of larger homes explains the rise in the median, it does not mean that those homes have rising values. Indeed, even as the median goes up, it is quite plausible that the value of those homes is declining.
We have observed before that most market areas contain a number of price ranges. Think of them as layers, something like geological strata. Consider a hypothetical example, greatly more simplified than any real market. There are three levels to this imaginary market: Starter Homes that currently range from $150,000 - $200,000; Mid-range Homes that are $300,000 - $500,000; and Luxury Homes that run from $800,000 - $1 million.
Now, if in one year there were 20 sales of Starter Homes, 5 sales of Mid-range Homes, and 2 sales of Luxury Homes, the median would be somewhere in the Starter Homes range of $150,000 - $200,000.
Suppose that in the next year, the Mid-range Homes and the Luxury Homes each experienced price declines in the neighborhood of 30%. (It happens.) Now, their respective price ranges would be $210,000 - $350,000 and $560,000 - $700,000. Suppose that, along with those price declines, sales of those higher priced properties picked up. Let's say that in the next year there were 5 sales of Starter Homes, 15 sales of Mid-range Homes, and 7 sales of Luxury Homes. The median then would be in the middle range of $210,000 - $350,000. It would be higher than the year before, even though it was reflective of sales of properties whose values had declined.
Sellers need to know that they can't infer very much about the value of their particular home from data about the market in general. They need to be informed about what is going on in their particular segment of the market. Providing that information in a clear and meaningful manner is the job of their agent. It's not an easy one.
www.ArizonasRealEstateGuy.com
Let us recall what the median is. It is the midpoint. It is not the average. (I am not saying that the average is a better measure.) Consider a simple example: Suppose there have been widget sales at $100, $400, $600, $800, and $1,000. The median is $600. The average is $580. If the top sale were $3,000 rather than $1,000, the median would still be $600, whereas the average would now be $980. I do not argue for which is the better measuring stick; I just want to note the difference.
So what should we make of the news that the median price has been rising? Does it mean that "prices are going up"? Or what?
Many observers have noted that the rise in the median does not necessarily indicate a rise in prices in general. Rather, it is reflective of more activity at higher price ranges than had been experienced in the recent past. In many market areas, for the past year to year and-a-half the greatest activity – practically frenzy in some areas – has been at the bottom of the price ranges. This is not a surprise. Smaller condominiums and starter homes were generally what constituted the first wave of foreclosures on loans that never should have happened. More recently, though, the number of sales has increased in higher price ranges. As the effects of high unemployment and a staggering economy spread throughout the land, there are more sales – many of them distressed sales – of larger homes, ones that people expected to live in a long time.
While the increased sales of larger homes explains the rise in the median, it does not mean that those homes have rising values. Indeed, even as the median goes up, it is quite plausible that the value of those homes is declining.
We have observed before that most market areas contain a number of price ranges. Think of them as layers, something like geological strata. Consider a hypothetical example, greatly more simplified than any real market. There are three levels to this imaginary market: Starter Homes that currently range from $150,000 - $200,000; Mid-range Homes that are $300,000 - $500,000; and Luxury Homes that run from $800,000 - $1 million.
Now, if in one year there were 20 sales of Starter Homes, 5 sales of Mid-range Homes, and 2 sales of Luxury Homes, the median would be somewhere in the Starter Homes range of $150,000 - $200,000.
Suppose that in the next year, the Mid-range Homes and the Luxury Homes each experienced price declines in the neighborhood of 30%. (It happens.) Now, their respective price ranges would be $210,000 - $350,000 and $560,000 - $700,000. Suppose that, along with those price declines, sales of those higher priced properties picked up. Let's say that in the next year there were 5 sales of Starter Homes, 15 sales of Mid-range Homes, and 7 sales of Luxury Homes. The median then would be in the middle range of $210,000 - $350,000. It would be higher than the year before, even though it was reflective of sales of properties whose values had declined.
Sellers need to know that they can't infer very much about the value of their particular home from data about the market in general. They need to be informed about what is going on in their particular segment of the market. Providing that information in a clear and meaningful manner is the job of their agent. It's not an easy one.
Michael Pittman
www.ArizonasRealEstateGuy.com
Keller Williams Sonoran Living
Realtor®
602-622-2776 Main