Median Prices are a Good Reflection of the Market

[powayseller]

sdrealtor is right, and I love the example.

jg, your graph proves the point that the median is a lagging indicator. The median is down 7% from its peak in Nov 05, but we’ve got houses down 20%. The Case-Shiller index is down only .98% from Sept 05 to Sept 06. Anyone looking at the median mistakenly thinks their homes is worth 5% less today. The median is so useless, that Bob Casagrand, a realtor who spends 3 days every month analyzing the MLS data in Excel, stopped posting it in his monthly report. Because the truth on the ground is so far off from the number.

Eventually, the median will show the decline. When the market turns around, the low end will pick up first, skewing the median down. So everyone tracking the median will think the market is still dropping, when in reality it will be on a rebound.

There is no way in the world you can know what is going on in housing unless you are on the ground, hitting the pavement, and talking with realtors. In my case, I talk with realtors as much as I can. We are very fortunate to have the wisdom of sdrealtor and SD Realtor and bloggers like Jim Klinge, Bob Casagrand’s newsletter, and my various realtor friends. You simply cannot understand housing by just looking at data, and I become more convinced of that as time goes on.

Employment and recession are lagging indicators of the economy, so it’s not news that a number can be a lagging indicator.

I just don’t understand exactly why the numbers lag by 18-24 months. Some of it is because as prices drop, people buy more expensive homes. First time buyers are priced out. Both reasons mean a greater percentage of the sales are higher end homes, but even those homes are worth less today than last year. Case-Shiller could be affected by all those kitchen remodels. Perhaps remodeled homes sold while unremodeled homes did not, so there is no outlier to throw out. 4 bedroom homes sell while 3 bedroom homes just sit…so many variables.

kristinejm – Steve is talking about incremental cost. There’s a baseline cost for the land, and each additional square foot costs $50 – $70 (or more).

[Mexico Resident]

Steve Beebo,
Your data could be mined. Or is it real? You would have to do analysis on each property to make sure no major remodels or other factors intervened. This is why I tend to agree with sdrealtor who drills down a little more in his analysis. Why do you think that the downturn could last 1-2 years instead of 5-10 years as suggested by historical trends? I have not lived in So Cal in years and some of the antics on this board make me glad I DON’T live in So Cal. It was a land of opportunity 50 years ago but I’m not so sure now.

[SD Realtor]

Steve – This is SD Realtor, as opposed to sdrealtor who responded to your post earlier.

So okay here are some statistics I would like you to look up.

Also lets take a look at 91914. Since 11/1/06 there have been 3 solds. Okay those will be used to generate the new median. Yet since that same time over 50 properties are either expired, cancelled or withdrawn.

So how does the median accurately portray that market? How does it even come close?

SD Realtor

[Anonymous]

SDR, you know, and common sense tells you, that if there are only three sales in one month, it is not something that you can rely upon.

Having said that, we live in La Jolla, and the while the data is noisy month-to-month due to low volume (20-40 sales per month), to me, there appears to be a downward trend in both price and sales:

[img_assist|nid=2274|title=
La Jolla Resale Home Sales and Median Price, ’88-’06|desc=|link=node|align=left|width=466|height=267]

I maintain that median price for resale homes gives a fine indicator of general market sentiment. Yes, it lags by 2-3 months, as SB laid out. But, during the last downturn, since trough prices (blue) remained in the trough for 3-4 years, a 2-3 month lag seems like much ado about nothing.

[powayseller]

jg, it seems like median lags by 1.5 years. Prices started softening in the low end the in the late spring/summer of 2004, as inventory doubled over just 6 months, at the same time that sales were falling. To me, that is the offical peak. Lower end properties were taking longer to sell, and prices were starting to drop. That worked its way up to SFR which peaked in summer 05. The median price peaked in November 05, 6 months after the SFR home prices peaked and 18 months after the slowdown started.

While some home prices are down 15-20%, and others are flat I guess (from what some on this board are writing), the median is down only 5%.

So does anyone think in aggregate, the homes in San Diego are down only 5%?

Supposedly Case-Shiller is even more accurate, because it compares sales of the SAME SFR over time. His data shows San Diego prices are down only .98%.

The median is down more than Case-Shiller probably because more lower end homes are selling. Neither tells us what is going on. They lag by 1-2 years.

[Anonymous]

ps, be complete in your sentences: “…it seems like median lags by 1.5 years…”. Lags what? Your imprecision makes it difficult for others, including me, to understand you.

Yes, prices lag sales by some years. So what. Accept the fact.

Official is spelled ‘official,’ not ‘offical’ nor ‘offal.’

No one cares about ‘median price.’ Individuals care about ‘median price for new condos,’ ‘median price for new homes,’ ‘median price for resale homes.’ Quit talking about median price, already.

Yes, home prices are only modestly down, now. They’ll come down further and faster as pressure (ARMs resetting, high spring inventory) builds. Some things take time.

Speaking of things that take time, how’s your website coming along? Please hurry up, so that we can compartmentalize your posts on 9/11 conspiracy, etc. to one site, where we can go should we be suffering from low blood pressure.

[powayseller]

The median price of SFR/condos/new homes (weighted median) lags the actual price decline of those homes by 18 months.

When I say median price, I am referring to all homes. If I mean only SFR, I would say “median price of a SFR”.

I gave an update on my website in another thread last week. I’m sure you read it. Here’s another example of someone pretending to be a great religious man, but being passive agressive and trying to belittle me. (9/11 is off-topic, let’s leave it there)

[no_such_reality]

Let’s adjust these numbers for inflation and transaction costs. The CPI numbers are available here by month.

If you subtract the common 6% transaction cost for broker commission and deflate the remaining money to purchase month/year equivalency, 50% of those deals lost money.

1646 Tennis Match Encinitas 6-03 499K 12-06 627K LC (less commission “clear”) $589 DD(Deflated Dollars equivalence) $537. A winner with CAGR of 2.1% above inflation.

1117 Lemon El Cajon 10-04 310K 12-06 389K LC $365 DD $346. Winner #2.

4503 Sierra Morena Carlsbad 7-03 440K 12-06 509K LC $478, DD $437. First loser, but not bad, basically break even. Hopefully his mortgage was cheap.

2876 Vista Acedra Carlsbad 1-04 800K 12-06 905K LC $851, DD $782. Loser $18K in Jan 2004 dollars or about $20K in todays dollars.

9276 Birch Spring Valley 11-04 475K 12-06 640K LC $602, DD $570, our Big Winner. Provided they didn’t rehab the property.

6151 Veemac La Mesa 6-04 398K 12-06 REO 410K Hey, it’s REO, obviously the owner lost. But the bank… Well, in June 2004 dollars that $410K is only $386K. If they paid a commission, all the worse, LC $385 DD $362. Ouch looks like even the banks lose.

2407 Sweet Sage Chula Vista 3-05 726K 12-06 820K Alright, a nice quick flip for $100K, but… LC $771, DD $739. Well, any profit is a profit. Hopefully they didn’t do anything to the house, because lately, even $45K of paper profit gets eaten quickly.

1586 Piedmont Chula Vista 3-04 455K 12-06 540K LC $508, DD $472. Winner #5.

717 Esla Chula Vista 4-04 530K 12-06 595K LC $559, DD $522. Loser #4

2524 Camino Narciso Chula Vista 4-04 720K 12-06 775K LC $728, DD $680. Real loss = $40K Ouch, our big loser. #5.

Let’s Make A Deal!

[Anonymous]

Show me the data that the median price lags the actual price by 18 months.

For that to happen, folks who compile statistics — DataQuick, OFHEO, Shiller — would have to selectively analyze the data, instead of taking 'all comers' and calculating a median.

Sounds like another conspiracy theory to me.

As SB said, there's a 2-3 month lag from signing the offer to close of escrow and publication of the results by DataQuick.

Please do update your website. Or, will there be an 18 month lag from August 2006 to the next update?

http://sandiegoeconomics.wordpress.com/2006/08/

[Anonymous]

Per an out-of-date local real estate website, purportedly, prices in modest markets can be out of phase/sync, or in fact lead by one year, prices in million dollar markets.

Maybe in Germany, but it does not appear to be the case in San Diego vs. La Jolla:

[img_assist|nid=2277|title=
Median Prices for Resale Homes in San Diego and La Jolla, ’88-’06|desc=|link=node|align=left|width=466|height=267]

As a ‘great religious man’ (I’m not great, but I am religious and I am a man), I see simultaneous moves up, down, up, and down between the lowly San Diego market and the high-brow La Jolla market.

Median price for resale homes works well.

[Anonymous]

Using Minitab’s cross-correlation function, the highest correlation between the median price for San Diego resale homes and La Jolla resale homes occurs at lag zero (cross correlation factor of 95.5%). The cross correlation at lag 12 (months) is only 74.8% and at lag 18 (months) is only 62.7%.

Plain English: prices for resale homes in low-rent (1X) San Diego do NOT lead prices for resale homes in high-brow (3-4X) La Jolla.

I look forward to a demonstration of the contrary case, of a low-rent neighborhood leading a high-brow neighborhood up and down. Not anecdotes, but a nice substantial time-series of median prices. Until then, such sounds like an urban legend.

Signed,
A modest religious man

Snarky line from FDR (or Churchill) about a person he held in low esteem: ‘He’s a modest man, with much to be modest about.’

[SD Realtor]

jg – This is precisely my point, (and to some degree Powaysellers and others point)… In my example there were only 3 sales and then almost 60 homes that came off the market.

So then how DOES the seller price his home correctly? You and Steve Beebo seem to maintain your stance on the median home sale price stats. So if a seller were to rely on that statistic then the odds are overwhelmingly in favor of the fact that that seller would end up NOT selling his home because he did not price correctly.

Even you have stated that the median price indicator is a lagging stat.

So while everyone on the post likes to bag on realtors and sellers about not pricing correctly, it would be a heck of alot easier if there was a MUCH MORE accurate or timely indicator of market performance.

How it is not obvious to people that market conditions are far from accurately portraying the conditions and sentiment continues to amaze me. So time after time I sit there and have to show frustrated sellers the real conditions as opposed to what they read in the monthly fishwrap about the precious median. Then when I show them the expireds, cancelleds and withdrawns they ask me, “why isn’t that reported?”

It frustrates me enough when sellers say things like that because in most cases they are simply not to bright. However to hear people on this site arguing that the median price indicator is an accurate gauge of the market is incredibly frustrating.

I only wish you guys could chat with sellers…

[Anonymous]

SDR, you have the experience pricing homes, and I defer to you.

My uninformed gut sense is that sellers focus too much on the sales of comparable homes. Prices have relatively plateaued for two years, now. However, during those two years, there have been important changes in the pool of buyers, none of which are good for sellers: there are fewer buyers, now, given the high home ownership levels; there are fewer buyers, now, given the lack of quick and easy profits to ‘investors’/flippers; there are fewer buyers, now, given that interest rates have been rising these last two years.

Fewer buyers — combined with soon-to-be desperate sellers, burdened by all-time high debt-to-income levels and rising interest rates — makes for a tough selling environment.

High inventory levels/high cancellations/high withdrawals/high expirations are only SYMPTOMS of the root cause, which is fewer buyers with lower wherewithal to pay.

If I was a seller, these are the things that I would take heed of, as I glanced at recent comparable sales.

Just my uninformed gut sense.

Sincerely,
A modest religious man

[(former)FormerSanDiegan]

The median is one of several market indicators and as such is a perfectly legitimate indicator of the market. How can one use it to justify the fact that the market is overvalued and due for a correction up to mid-2005, then toss it out as irrelevant in 2006 ?

Having said that, it is not accurate as a measure of what a particular home would sell for, nor does it adequately capture the trajectory of the market. It does not tell you what your house is worth. But as an indicator of market conditions ? Sure, it’s reasonable.

The median price has been used to demonstrate the following :

1. There was a large run-up in SD real estate above fundamentals (rental rates and incomes) from ~2000 to 2005.
2. There was a softening in sale prices starting in 2005.
3. That softening has led to declines in prices and continues to persist through November 2006.

Combined with sales activity, I find the median to be one of many useful barometers of the market, particularly for SFRs in established areas. If we toss out all of the useful estimators that have flaws, then we’ll be left with only anecdotal evidence (which is also quite useful, but not without other confirmatory evidence).

Personally I found the use of median prices by Rich in the Primer on this site to be quite useful for illustrating the extent of the residential real estate bubble in San Diego. It may not be perfect, but if it’s a legitimate parameter for making the case of the bubble, it ought to be useful for evaluating the extent of the bust.

[SD Realtor]

Okay so perhaps we are actually in agreement here. I do believe that the median price indicator is a useful component that is useful in studying the macroscopic aspects of the market and trends.

My problem is that on a daily basis I deal with individuals who do not take ANY of the other components into account. Today…this day… Dec 19th… I have a listing in San Carlos on Royal Gorge… you guys can look it up… Nothing special about this home. It is actually a perfect study in how sellers do not cope with declining markets correctly. They have been chasing the market down for months and months. They priced incorrectly to begin with, (against my advice) and are currently at 499k. They got an offer at 469k and they buyer requested 3% back for credits. Now I have been bumping heads with them on the counter offer. The wife wants to summarily reject the offer altogether. Even though there is a SOLD comp at 475k on the SAME street! She points to the median price all the time…

Arrrrrrrrrrgggggg… So again, the problem as I see it, is that there are no other useful statistics out there that are fed to joe public who wants to sell his home…

Here is a question for all of you out there. Many post here and say yeah I don’t need a realtor, I can sell my home as it is easy to do… Hey that is okay with me, no argument. So you all priced your home based on whatever comps you dug up. How many of you actually sold a property in a down market like this? Also when you priced your home did you have any idea how many homes did not sell in your area? How many expireds, cancelleds or withdrawns there were? My bet is that most of you have answered no to these two questions.

The point of the above questions is not to convince anyone to use a Realtor. It is simply to convey that the public is not given enough information to make well informed decisions. I think alot of this feeds fuel to the sticky on the way down mechanism. It can be argued that the Realtor should inform the client of all these facts and I do! However not all Realtors do that. Some will point to the median or point to outdated sales simply to get the listing and then lower the price after the home sits there…

So yes jg, I agree… all people should look at ALL of the symptoms of the problem. The main problem is definitely lack of buyers. Median price movement is a symptom just like higher inventory and more failures to sell. Each of them are important.

SD Realtor

[Author]

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