Meaning of the median?

[LAcrash]

Hi all, this is my first post to this site. I’ve been lurking for weeks, almost addicted, and finally decided to join in. I wanted to thank you for some very insightful comments, and the links to related websites, etc. I’m learning as I go, and learning plenty.

I’m in my mid-30’s. I sold my house in late 2004, due to my divorce. Luckily I did very well on it (bought it in 2001), and so I have some money to put a nice size downpayment on a new house. I figured that the market was at the top or near it when I sold my house, and that buying another one wasn’t a good idea. So I’ve been renting, waiting for the bubble to burst. And that’s finally started to happen in earnest. My plan: starting in November 2006 I will target potential homes and offer 20-30% less than asking (depending on how much I like the house). Someone is bound to bite, especially an FB (by the way, no schadenfreude here, just the way life works). I guess I could wait years for prices to drop even further as ARMs reset, etc., but there’s no guarantee of that of course, and 20-30% is nothing to sneeze at when the 2-bedroom homes I’m looking at in and around West Los Angeles are currently priced at around 700-800K.

I still have a lot to learn before I actually put my plan into action. Would some of you, particularly powayseller, please explain in plain English why the median price is a “lagging indicator”? This has been touched on in this site but not sufficiently, in my opinion. What do median prices tell us – and not tell us? It seems like with every report that the median prices stayed relatively stable or decreased slightly, the bulls have a field day. But I see tons of homes with “for sale” signs, and prices being reduced left and right as inventory builds and buyers wait to strike.

I would also appreciate any other comments you think may be of assistance to me. Thanks.

[powayseller]

This is a very important topic, and I owe my knowledge of this to realtor Bob Casagrand. I started a new thread about the median.

Other tips:
Bob tells me that as a buyer’s agent, he tells his buyers to pick 3 homes. Don’t get emotionally attached to one home, because if you do, you lose your purchasing power. Make a 24-hour offer on property #1. (My addition: write in the offer letter this is a firm and final offer, and that you have 2-3 other homes on which you are ready to make an offer; this puts pressure on the seller to take your offer and not mess around with countering; if they do counter, have your agent remind them that you mean it: firm and final or you walk. This sort of happened to me in my sale, and boy does it work!!) If the sellers counter, you go on to property #2. Only give them 24 hours; put more pressure on them.

I am sure the realtors on this blog can give you more tips.

Let us know how the offers turn out. My only other tip is to wait. I think the big price drops will start in 2008, as the majority of ARM holders are headed into foreclosure, inventory jumps, buyers keep decreasing as fear sets in, bank REOs make the news, and sellers who need to sell have to fight hard for the few buyers out there.

[carlislematthew]

One thing I’ve noticed about the median price is that the it’s the differences that are lagging. Basically, the reported figures are actually a YEAR ON YEAR increase or decrease in the median. For example, let’s assume you’re looking at a year on year increase of 1% in the median. Realtors and bulls would look at this and say that prices were still going up. However, it could very well be that prices were going up for the first few months, levelled off, and then started going down! Month on month prices would show you this trend in more detail, but they of course can be more volatile.

I suppose this explanation is not about the median as such, as it would apply to anything that was reported as a year on year statistic.

What’s important is the TREND of prices. The year on year figure is very nice for the history books, but is not a predictor of the future.

There are other aspects specific to the median that I know I’m ignoring – I just wanted to say my piece regarding the YOY statistics.

[SD Realtor]

Personally I am pessimistic as well. I believe that the annual figures that discuss year over year statistics do not bear out how really tough it is. I think John Hokkanens post about months of inventory is particularly accurate. Lagging indicators (in my opinion) are indicators that do not accurately reflect what is happening on the market. For instance the July year over year numbers just came out. The San Diego county numbers reflected the median price as being down 1.8% from July 2005. However sales are down over 30%. Also think about it. July sales mean that the properties went into escrow back in May or June…. Essentially the market is much worse then that. So not only is the median price a lagging indicator it is essentially innaccurate.

Your idea about submitting lowball offers is not a bad idea. Expect most people to decline. However ALL IT TAKES IS 1 to be accepted. I liked Powaysellers strategy. Even though she broke my heart and mentioned that other agent… (j/k PS)

Seriously though, I would really try to exercise patience if I were you. While you will get a good deal with the manner you plan to operate under, I believe the simple risk verses reward plays out for you to wait. The risk that the prices will go up again is quite low compared to the reward that you could realize.

I believe the return on something as simple as a CD will by far outperform housing appreciation over the next few years. I really believe it is a no brainer.

[powayseller]

carlislematthew – I don’t know why the median is reported year over year, and GDP is reported quarter over quarter, many government data is reported monthly. Oil prices are reported daily or hourly. The median peaked in November, but people not following real estate, had no idea.

SD Realtor – why doesn’t the NAR report months inventory, pending sales (because they reflect currect conditions) instead of the median which reflects offers made many months before? It seems that reporting monthly median changes would be helpful to the NAR mission of promoting RE buying, as prices are rising. Why didn’t they adopt that method during this last cycle? What kind of rapport do most realtors have with the NAR or CAR? Last question – what are you waiting for to buy a house again? BTW – you are one of my favorite realtors: ethical, honest, hard working, very nice, smart, funny. You’ve figured out this market, and you are here to teach us about it. You’re really great!

[rankandfile]

I view the median price like a weather report that is a week or a month behind. Would you use it to plan your family barbecue? Sometimes the best way to get a grip on the weather is to walk out your front door. I try to get an idea of what the market is doing in a more informal way. I do things like follow the number of Craig’s List postings, the number of NODs on Foreclosure.com, and the number of listings on Zip Realty or Realtor.com. I like to see if the number of listings are increasing/decreasing, and whether the price is going up or down. Put these into an Excel spreadsheet and you have your own little housing trend index!

[powayseller]

Very interesting…I would love to see some of our data. How long have you been gathering it, and what are your conclusions? What role will the internet have, via our access to more information, in helping us follow price movements in real estate?

[rankandfile]

I have nothing worthwhile, but can put something together. If you know of any other indicators that may be helpful, let me know. I dont have time to do a bunch of digging and sifting, so the simpler, the better. Is it possible to attach an Excel spreadsheet to this forum?

[powayseller]

You could do a write-up without the data files. I don’t know how to put Excel files here.

[LAcrash]

Those are some interesting points.

Powayseller, thanks for the excellent post on the median in the new thread. Now I get it. The question is, will John Q. Public? Probably not. John Q Public thinks that when the real estate agent interviewed by the local paper says the market is doing OK, the market is doing OK.

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