Do you understand and trust the measures of market prices? Today we will explore the median sales price as a measurement of market prices.
Irvine Home Address … 14951 Sumac Ave Irvine, CA 92606
Resale Home Price …… $720,000
Cause I was born lonely down by the riverside
Learned to spin fortune wheels, and throw dice
And I was just thirteen when I had to leave home
Knew I couldn’t stick around, I had to roam
But I got to ramble (ramblin’ man)
Oh I got to gamble (gamblin’ man)
Got to got to ramble (ramblin’ man)
I was born a ramblin’ gamblin’ man
Ramblin’ Gamblin’ Man — Bob Seger
Is everyone ready to gamble on the housing market again? Are prices going up again? Are you sure?
Median as Housing Market Price Measurement
There is no perfect measure for any broad financial market activity.
Markets for stocks, bonds and other securities are the most widely
reported and measured financial markets. It is relatively easy to
measure activity in these markets because all sales are recorded at a
few central exchanges and the “products” are uniform (one share of
stock is equal to another). In contrast, real estate markets are much
more difficult to evaluate. Real estate transactions are recorded
into the public record in thousands of locations across the country.
Keeping an organized database of these records is such a daunting task
that the title insurance industry has taken this responsibility as part
of its business model, and many people are devoted to the arduous task
of obtaining and organizing these records on a daily basis.
Real estate
does not have the uniformity of stocks or other financial instruments.
Each property has unique qualities that differentiate it from all other
properties making like-kind comparisons very difficult. Geographical
location is a major influence on the value of real estate. Even if two
properties could be found with identical physical characteristics, the
values of these properties could vary considerably based on where they
are located. Ideally, a market measure would record the changes in
sales prices of identical assets or in the case of an index, a group of
similar assets. The unique nature of real estate assets makes it
difficult to use standard measures of reporting utilized in other
financial markets.
Due to the problems of asset uniformity and variability based on
location, real estate markets are typically measured using some form of
median pricing over a specified geographic area. The median is a
statistical measure of central tendency where half the data points are
above and half the data points are below. For instance, in a list of 5
numbers sorted by size ($100,000, $200,000, $300,000, $500,000,
$900,000,) the third number in the list ($300,000) would be the median
because it has two numbers that are larger and two numbers that are
smaller. The median ($300,000) is used rather than an average
($400,000) because a few very expensive properties can increase the
average significantly, and the resulting number does not represent the
bulk of the price activity in the market.
Median Home Prices, 1968-2006
Median is Not Perfect
One of the problems with a median as a measure of house prices is a
lag between when a top or a bottom actually occurs and when this top or
bottom is reflected in the index. During the beginning of a market
decline, the lower end of the market has a more dramatic drop in volume
than the top of the market. This causes the median to stay at
artificially high levels not reflective of pricing of individual
properties in the market. In other words, for a time things look better
than they are.
Then as the price decline takes hold, transaction volume picks up at the low end and drys up at the high end. The flood of low-end transactions at much lower price points makes the median snap back and make the decline look worse than it really is.
Finally, as the price decline wears on, transaction volume will begin to accelerate at the high end — at much lower price points. This activity is still above the median, so the median moves higher whereas prices are actually moving lower.
At the beginning of a market rally, transaction volume
picks up at the bottom of the market at first restarting the chain of
move ups. During this time, the prices of individual properties can be
moving higher, but since the heavy transaction volume is at the low
end, the median will actually move lower.
With all variability caused by changes in the product mix, the median is a poor record of market tops and bottoms, and it is prone to show a direction of market prices that is incongruous with what is happening with individual properties.
Other Distortions of Median
The median has another significant weakness: it does not indicate
the value buyers are obtaining in the market. The houses or structures
built on the land compose the most significant portion of real estate
value in most markets. These structures deteriorate over time and
require routine maintenance that is often deferred. During times of
prosperity, many people renovate homes to add value and improve their
living conditions. The impact of deterioration and renovation of
individual properties is not reflected in the median resale value.
Also, at the time of sale, there are often buyer incentives which
inflate the recorded sales price relative to the actual cost to the
buyer. These buyer incentives also distort the median sales price as a
measure of value.
Median is the Best We Have
With all these distortions of market reality, it is a wonder the
median is used at all. Winston Churchill noted, “It has been said that democracy is the
worst form of government except all the others that have been tried.” The same is true of the median. We use it not because it is perfect, but because it is the best available for the task. Despite its weaknesses, distortions in the index
are not extreme, and it is the best tool available that provides a
meaningful number.
Tomorrow, we will look at Alternate Market Price Measurements including the more reliable S&P/Case-Shiller Index.
Irvine Home Address … 14951 Sumac Ave Irvine, CA 92606
Resale Home Price … $720,000
Income Requirement ……. $132,518
Downpayment Needed … $144,000
Home Purchase Price … $41,500
Home Purchase Date …. 4/25/1973
Net Gain (Loss) ………. $635,300
Percent Change ………. 1634.9%
Annual Appreciation … 8.2%
Monthly Mortgage Payment … $3,092
Monthly Cash Outlays ………… $4,030
Monthly Cost of Ownership … $3,010
Redfin Property Details for 14951 Sumac Ave Irvine, CA 92606
Beds 4
Baths 2 full 1 part baths
Size 1,873 sq ft
($384 / sq ft)
Lot Size 5,500 sq ft
Year Built 1972
Days on Market 3
Listing Updated 10/6/2009
MLS Number S591760
Property Type Single Family, Residential
Community Walnut
Tract Cp
Fantastic 2 story home located in the very desirable College park community. Enjoy this very open floor plan featuring 4 BR, 3 baths, formal dining room, very large living room and family room with view of pool. The home is extremely clean and has been very well maintained, new paint throughout much of the house, professionally cleaned carpets, and fantastic large backyard with pool for entertaining. Also enjoy the great association pool located just down the street from the property.
I must admit, this one made me sad when I reviewed it. When I saw a discretionary seller from 1973, I hoped I would find a property with zero debt. They bought 36 years ago; surely they paid it off by now, right? Well, this is Southern California…
By 2001, they had the debt up to $231,000. By the time they stopped borrowing in 2006 when they took out a 1-year ARM for $340,000. WTF is a long-term owner doing with a $340,000 1-year ARM? Sophisticated financial management?
I guess this won’t be a short sale as this is about a 50% LTV. I was hoping to profile a celebration of zero debt, and instead I find $340,000 worth of HELOC abuse. It is sad… 🙁
Real estate in California is magic. Ordinary tract homes can attain Manhattan Island values. Houses are not merely shelter, they are investments with unlimited wealth potential that can double your income — at least in the kool aid intoxicated world of most would-be owners.
