Stats are often misinterpreted
Question: Allison, the average home prices in Summit County are very strong, but we notice that we’ve seen lots of different numbers. What should we look at when trying to get average sales price:
Answer: Good question. One of the most commonly referenced statistics in the real estate industry is the median sales price of homes. According to Stephen Bedikian, many articles are published in newspapers the day after the National Association of Realtors releases its quarterly Metropolitan Area Existing-Home Prices report with conclusions about the healthy or unhealthy state of the local real estate market. Unfortunately the median sale price is frequently taken out of context and misinterpreted.
Even someone who slept through most of their math classes will remember that the arithmetic mean and median statistics are different for the same data set. The average is the sum of the numbers divided by however many numbers you started with. The median is the number in the middle, when the numbers are listed in order.
The reason that the mean or average sale price for a market area can be misleading is intuitively obvious and that's why it's rarely cited. A few sales in the extreme luxury segment of a market -- think $30 million or more in Bel Air -- can push up the average for the entire local market area.
The median sale price can also be misleading particularly in down markets. Let's consider the San Francisco market. The median home price reported by NAR in the first quarter of 2007 was $748,100. In the second quarter it was $846,800 -- a jump of more than 13 percent. Wow, that appears to be a sure sign of a healthy market. Or is it?
To get a truer picture of market conditions, let's consider a few more statistics: price indexes (using a repeat-sales price methodology), the number of sale transactions, price reductions and inventory growth. From April to June 2007, the S&P Case Shiller Home Price Index showed a decline of just less than 1 percent, not an increase of 13 percent. Likewise the home-price index published by OFHEO showed a decline of just less than 1 percent for the second quarter. The S&P Case Shiller index covers only resale transactions while the OFHEO data covers multiple sale types but only for conforming loans.
FIS Data Services reports that sale transactions increased about 25 percent between the first and second quarters, which is to be expected given that period corresponds to the spring selling season. However, according to Altos Research data, the market inventory level increased almost 40 percent during the second quarter and the percentage of houses listed with a price reduction increased from about 33 percent to 43 percent.
So what actually happened? Sales transactions increased with a greater proportion on the high end versus the previous quarter. There appears to have been little actual appreciation as evidenced by the Case Shiller and OFHEO numbers, while inventory increased and prices of many listed properties were reduced. So next time you read that median house prices have increased in your area, don't celebrate prematurely. Conduct more research before you reach a conclusion about market conditions in your area.
For answers to your real estate questions, call Allison at 970-468-6800 or 1-800-262-8442. Email - [email protected] or visit their web site at www.SummitRealEstate.com. Allison is a long time local in Summit County. Summit Real Estate – The Simson/Nenninger Team is located at the Dillon Ridge Marketplace. Allison’s long-time residency and years of real estate experience can help you make the most of any buying or selling situation. She’s a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.