Dropping Home Values - Is It As Bad As They Say?
How Averages and Medians Can Skew the View
Nearly every national housing article mentions a reduction in AVERAGE and/or MEDIAN home values. Now it's true that values are dropping in some areas. But it's not as bad as it looks.
Here's why:
A change in SALES MIX can cause AVERAGE and MEDIAN to reduce - but just because the average and median have gone down, it doesn't necessarily follow that your home (or the home you plan to purchase) is worth less.
Here's an example of what happens when first time homebuyers start taking advantage of the terrific tax credit.
Suppose in an average month, your town has the following home sales:
1 - $500,000 home
1 - $400,000 home
2 - $300,000 homes
3 - $200,000 homes
3 - $150,000 homes
To find the average, add all the values of the homes, then divide by the number of homes sold. The average is $255,000. The MEDIAN is the "middle value" when all the numbers are lined up from smallest to largest, in this case the median is $200,000.
One Year Later - Recalculating Averages
OK, now suppose one year later, the sales mix has changed. "Jumbo loans" are much harder to get, and the interest rates are much higher than FHA or conventional financing. So the $500,000 buyer decides to wait until they can make a bigger down payment. In the meantime, the first time homebuyers have increased.
Here's the new "sales mix":
1 - $400,000 home
2 - $300,000 homes
3 - $200,000 homes
7 - $150,000 homes
Here's the catch - and why averages and medians can be misleading
The AVERAGE sales price in this month is now only $203,846 - or nearly 20% lower than the previous year.
The MEDIAN sales price is now $150,000, or about 25% lower than the previous year.
THE OVERALL HOME VALUES HAVE NOT CHANGED, JUST THE MIX OF HOME SALES!!!!
Bottom line - AVERAGE and MEDIAN is affected by BOTH the sales mix AND the appreciation rates - and a change in mix can affect these measures even more strongly than a change in actual values.
In the Raleigh area, we're still seen positive appreciation every month - read more here!
Appreciation Rates Wake County - Best Places to Buy
Wake County Inventory Levels April 2009
Luxury Home Inventory - First Quarter 2009
Durham NC Inventory Disappearing! 23% Down...
So next time you hear that the average or median values have decreased, find out whether the mix of sales has changed, AND find out what the appreciation rates are. A recent comparitive analysis and an in depth look at appreciation rates will still tell you more than any average or median will.
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In our area that 500K home is now worth $350K depending on the neighborhood so the average home prices have dropped. So I'm not sure they analogy works for us. That is why when I look at sales data I look at a specific neighborhood and compare this year to last year. If you look at the entire area then who knows what numbers you are going to come up with.
Cindy - I'm not arguing with the fact that home values have dropped in some areas - and northern Virginia has certainly been affected. Just trying to illustrate that a change in sales mix can really change average and median values - which is why it's so important, like you said, to compare specific, local sales data.
I really do enjoy reading your blogs. Thanks for providing this information to us. I am constantly learning more and more as I read on AR. Keep up the great works.
Penny, I can see where the numbers can be misleading. Can you imagine what happens when the media take a National average? Thanks.
I agree. It's all in how you look at that data. And, the average person does not understand that, and just believes whatever the media decides to tell them.
Eric - Glad we're providing something of value! (and it's fun...)
Michael - National averages can be the most misleading of all, particularly when they take large chunks of data from a few states that experienced huge bubble growth.
The stats just help sell papers and and news ads. Personally I believe the median is a term used frequently that folks don't understand.
Chad - Statistics can sound very authoritative if you don't know where they're coming from or how they're calculated. That was the inspiration for this article!
Gary - Median values can be the most misleading of all. Just because a value is in the middle of the pile, doesn't mean much of anything. Here's two examples:
1, 1, 2, 2, 3, 4 Median is 2, average is 2.16
1, 2, 2, 2, 5, 6 Median is 2, average is 3
You can have the same median with some wildly different sets of data.
Great Post. I often wonder why they even bother reporting median values for real estate. It can be very misleading. I guess it's just another way to put a negative spin on data to sell papers :)
Averages can be misleading when the market is more attracted to lower priced homes and the inventory of lender owned foreclosures that are sold in "as-is" condition.
Follow me on Twitter: http://twitter.com/roykelley
Interesting. I do find median price very misleading. It has no basis in market value because it's simply the number over the center price and the number under the center price sold.
However, I find average prics a true reflection of value. As a basis for comparison between two different times, I find averages very valuable.
Matthew - median certainly isn't as valuable as average as an overall indicator. If anything, both values should be used together.
The data is true... its really about how different entities or groups "leverage" the data to their advantage. I think we can all leverage the data to our advatage... its the spin you put on it.
Roy - And averages can also be pulled down when investors are jumping back in the market and increasing the percentage of lower priced "fixer upper" homes purchased.
Penny,
Great Post. It amazes me how the media, interprets the data of what is going on the real estate market. To get a true picture the data needs broken down in away you are comparing apples to apples. For example a particular price range may see an increase in sales, while another price range may see a decrease. If you lump all the data together it may show different results.
Thanks for sharing,
Matt Naumann
Lenn - I know you know your numbers. Only thing I would say is that mix still has a big influence on averages, especially if you add a large quantity of buyers to a lower price point bucket (first time homebuyer tax credit). Thanks for commenting!
Kevin - it is funny reviewing the statistical sources, there's always one number or statistic that gets pulled out of context and used in the headline.
Hi Penny,
Most agents do not understand the difference in Median and Average prices so for sure Consumers do not. You are right on target -- the mix of sales is what causes the confusion.