Median Home Price - Fools Gold

An article ran yesterday in the Contra Costa Times that claimed "Housing Prices Stay High in Pockets". The article claimed that some of the affordable areas of the East Bay, such as Livermore and Oakley, were actually experiencing increases in prices.

While most Bay Area home values stagnated or dropped in August, the less expensive pockets of the East Bay saw home prices rise or stay the same, housing analysts reported.

Andrew LePage, an analyst with DataQuick Information Systems, said that it was not uncommon to see higher gains in appreciation in more affordable areas.

"It doesn't surprise me that their median prices are still up; it's a general trend across the state," he said. "But obviously we need to see a long-term study to make a compelling argument."

According to DataQuick's monthly city report for California, housing in established cities in the East Bay burdened with a resale market and little new growth declined the most in value. In Alameda County, housing in Alameda, Berkeley and Emeryville dropped in value while both Oakland and Livermore prices rose. In Contra Costa County, Richmond, Walnut Creek and San Ramon prices dropped while San Pablo, Pittsburg and Oakley sported higher pricetags.

Now if I owned a home in Oakley or Livermore, I would be excited. However, this does not match what is actually happening in the markets in both of these cities. Both of these markets are soft, with lots of unsold inventory, price reductions, longer market times, and builders offering incentives to skeptical buyers to entice them to purchase.

My point is simple... Median Home Price statistics have to be the most misleading measure of the relative strength of a housing market available. Yet it is widely published and quoted as the ultimate source of market information. As a broker who is on the front lines, however, I can tell you that drawing any conclusions from this statistic is fools gold.

Here is the problem. Median home price is a measure of the median sales price of homes in a given area for the period of time. It represents the figure where an equal number of sales occured below and above the median home price. It is used in statistics because it eliminates wild fluctuations that would distort a general average figure. For example, if an $8 million dollar home closed in a small city, it would dramatically change the average sales price, but would have little effect on the median home price. But the median home price is really only significant for large data samples (i.e. the whole State of California, for example). I recently tracked the median home price for closed sales in Pleasanton. In March, the median sales price for single family homes in Pleasanton was $800,000. In April, the median home price in Pleasanton jumped to $965,000, a 21% increase. And there in lies the problem. Before you go out and list your Pleasanton home, I can assure you the market value did not go up 21%. Anyone who has their home for sale knows that it was moving the other direction.

Let's say a new high end development opens up in Byron, for example. If all other things remain the same (which, of course, is never the case) you would expect the median home price in that area to increase over the time period where they new homes close, as a higher percentage of home sales will be on the high end of the scale. But this increased competition from the new homes on the market might actually decrease demand for existing resale homes, and there could be an actual decrease in market value for many of the homes in that area. But because a higher percentage of closings are higher end homes, the median home price would be higher, prompting headlines such as "Byron Market Shows Price Increases" and "Appreciation soars in Bryon". But in fact just the opposite could be the case.

So why does the media focus so much on the Median Home Price for it's data on the housing market? For one thing, it is easily attainable. Several sources release data about the Median Home Price, including the National Association of Realtors, the California Association of Realtors, Dataquick, and others. Another factor is the dynamics we have discussed in this article, which can show increases in the median home price even when the market is declining. This benefits the Real Estate industry, which likes to portray the real estate market in a positive light. Lastly, other more telling measures of the strength of the market are much harder to aggregate. You do see statistics released on the supply of unsold resale homes, inventory turnover (number of month's supply of homes on the market), new home sales levels, etc. But none of these statistics can accurately measure the relative value of homes over a period of time. The best measure would be to find homes that closed escrow, and subsequently sold again a year later, or two years later, and determine the gain or loss on the sale of that home. If the home had not been improved since the sale, that would be a good indication of the change in market value. But even this is imperfect, as perhaps there was desperation in one of the sales that skews the value, or the home gets improved during the period of time.

The bottom line is that there is no one statistic that is readily available that can give you an accurate picture of the relative increases/decreases in real estate values. Savvy experts in the field will consider several factors to determine the trend in property values, including resale inventory levels, days on market, inventory turnover, builder sales levels, builder incentives, and % of sales price to asking price for closed sales. By watching all of these market indicators over time you can get a strong sense for the direction of the market. As always, be careful what you read into statistics.