May 21, 2007

Is "median" the best way to understand what's happening with home prices

Home prices are in freefall - just look at the exploding supply, the incredible drop in demand and the surge in how long it takes to sell, and you know what's happening (and what's going to keep happening) with prices. Econ 101.


Also, there is no reputable organization who can document prices (what, we're going to listen to the realtors?). Especially since incentives and cash back are not part of the equation.

But today's question is on HOW prices are reported by the NAR and in the MSM - the use of "median" - half above and half below.

Here's 10 homes:

100,000
100,000
100,000
100,000
200,000
________ median
200,000
300,000
500,000
600,000*
1,000,000

The median price in this city is $200,000

But we all know what's happening is that the biggest haircuts are coming at the middle and top of the range - the stupid houses and condos that had no business selling for way above people's incomes. You know, that $600,000* 1-bedroom apartment in Phoenix bought by a flipper with a liar's loan. So that falls to $400,000 (for now). Heck, that $1,000,000 unaffordable house bought on a cash-back at close deal also falls 20% let's say, to $800,000.

In the above example, the median price for this city is still $200,000

Anyone see the problem? Try selling a $600,000 1-bedroom apartment in Phoenix and you will.

Reports of increases and decreases in home prices are typically quoted as changes in the median home price. This can be misleading because changes in the median price doesn't indicate how much appreciation or depreciation has taken place.

The median price is the price that is midway between the least expensive and most expensive home sold in an area during a given period of time. During that time, half the buyers bought homes that cost more than the median price and half bought homes for less than the median price.

Changes in median price measure changes in market activity. When there are more buyers buying less expensive homes than there are buyers buying more expensive homes, the median price falls. Conversely, when there are more buyers buying more expensive homes than there are buyers buying less expensive homes, the median price rises.

32 comments:

Anonymous said...

Here's a better eample:

1
1
1
1
2
________ median
200,000
300,000
500,000
600,000*
1,000,000

The median price in this city is $200,000

Anonymous said...

Finally, although it's impossible to predict the timing, I am certain of one thing: When this unsustainable environment finally ends in tears, people will ask, "How could we have known?" -- when all that would have been required was a little understanding of financial history.

keith said...

I love how the media reports the median figure as "the average home price", having no understanding of median, mean, mode and midrange

Anonymous said...

Well, that pretty much cinches it.

It is official.

You don't have a clue.

Anonymous said...

And just think what the numbers would be if all NAR members reported their data! Since the market turned several NAR members have stopped doing so.

Anonymous said...

Maybe that's the case in Phoenix, not here.

I went out yesterday to look at some homes. I keep reading/hearing how there are record number of houses for sale. What they don't mention is that all those houses are the shithole $150K homes. The homes bought by people with 500 FICOs. The homes bought for quick flips. In $150K neighborhoods, yes every 2nd house is for sale. And those $150K homes will probabaly be selling for $100K in no time since 500 FICOs aren't qualifying anymore and the flippers are gone.

However, in the area I am looking for, it's a another world. It's all about the school district, meaning if you want to live among white people, this is where you live, and if you want your kid to go to a school that is 95%+ white, this is where you live. And people don't give a shit if they have to eat catfood when they're old, they will sink every penny they have into living there. Prices start around $500K.

I went to 3 open houses yesterday, all of them had someone there when I came in, and someone was coming in when I was leaving. I had been monitoring a few homes since March and every one of them has been sold already.

While driving around I also saw numerous new subdivisions. Prices ranged from the high $500Ks to one which was $1.2M+. And they too looked fairly busy with traffic.

On HP you guys keep talking about 3X income and how in the world can anyone afford $600K for a home when the average salary is $50K a year. Easy, all the California equity refugee money is making it happen. Despite what you all may think someone who bought a $300K home in LA in 2000 and "lost" $100K from last year is still walking away with $300K in equity by selling today. They come here, see a $600K home that would have cost $1.5M in LA and think they're getting the greatest deal on earth.

The other argument I've heard is that the move-up market is being killed by the subprime issues. Not really. That 500 FICO in the $150K home was never going to buy a $600K home. Now that they are defaulting, it doesn't affect the $600K market.

I'm still waiting and hoping this supposed crash makes its way over here, but every week I'm less and less sure about it.

Anonymous said...

I bet most realtors don't have any idea what median means

Anonymous said...

Average


In mathematics, an average, mean, or central tendency of a data set refers to a measure of the "middle" or "expected" value of the data set. There are many different descriptive statistics that can be chosen as a measurement of the central tendency. The most common method, and the one generally referred to simply as the average, is the arithmetic mean. Please see the table of mathematical symbols for explanations of the symbols used.

In statistics, the term central tendency is used in some fields of empirical research to refer to what statisticians sometimes call "location". A "measure of central tendency" is either a location parameter or a statistic used to estimate a location parameter.

Tesla said...

The median is usually OK as a market indicator. It's not perfect but it is a pretty simple statistical tool. But it becomes less relevant as an economic indicator when the distribution of houses sold shifts, as is happening right now. We're seeing something called "survivor bias", when the statistics are skewed upwards because the bottom of the market is falling apart.

The real way to keep track of price movements would be to create an index that tracks the sale price of the same house as a function of time. I believe that's what Robert Schiller's housing index is (or is related to).

Anonymous said...

I'd like to a see an index that takes into account price, sq footage and lot size. That way no matter what the mix of homes sold is, the index would be an accurate indicator of the overall market's direction.

michael said...

Anon May 21, 2007 11:21 AM,

supply and demand works no matter what color you are...i promise.

sit back and grab some popcorn.

Anonymous said...

yeah and the NAR has hired another new shill.

Anonymous said...

The other argument I've heard is that the move-up market is being killed by the subprime issues. Not really. That 500 FICO in the $150K home was never going to buy a $600K home. Now that they are defaulting, it doesn't affect the $600K market.

I'm still waiting and hoping this supposed crash makes its way over here, but every week I'm less and less sure about it.

May 21, 2007 11:21 AM

You sound like a ramen eating realtor. Many debt zombies bought at $500,000 + and are going bellyup.who you fooling u scum.

Mort said...

Average price per square foot might be better.

Anonymous said...

Don't forget the neg am loans are still building. When they hit their max amount the owner must begin paying the full amount. That's when the fun will really begin!

Anonymous said...

But, but they employ big dollar statistician's with those degrees. Plus they got those fancy dancy komputers and all, all I got is my abacus.

Anonymous said...

1:21,

You're a tool and big one at that. I wrote that genius. I'm not a realtor, I'm telling you what I'm seeing. There are practically NO homes for sale in the $500K area, at least relative to the $150K area.

The $150K homes are in the ghetto, blacks and mexicans own them. They don't move to $500K homes dumbass. They never have and never will.

As for the belly-up comment, maybe in California where those same blacks and mexicans bought the $500K homes. As I tried to explain to you brain dead zombies is that the rest of the country is not California. The $500K homes are owned by professionals, almost all of them white. And unlike you dumbfucks in California, people in $500K homes drive Camrys and Accords, not Escalades, meaning they didn't HELOC the shit out of their homes.

Instead of knee-jerk name calling take a second and have thought for yourself.

devestment said...

Can I buy housing or groceries at core or median prices????

Anonymous said...

according to HP:

median price isn't accurate
average price isn't accurate

yet you are all convinced prices are down 20%

how do you know?

g said...

"I'd like to a see an index that takes into account price, sq footage and lot size. "

The Shiller index DOES account for changes in size and quality of homes over time, as well as inflation. What it seems to be saying is, we are in the opening stages of a 45% drop in home prices for reversion to the historical mean. Hell, even to the historical median ;)

Don't be fooled if the Fed drops rates to the floor to prop up numerical values, because if they do that we will be strangled by inflation.

burn baby burn said...

"g said... Don't be fooled if the Fed drops rates to the floor to prop up numerical values, because if they do that we will be strangled by inflation"

Rates always go up to fight inflation.

Anonymous said...

From a poster on the NJ housing panic blog:

"Price Drop has to be significant to make monthly mortage come down.

You have to factor in Interest rate increase as well. Since interest rates are projected to increase upto 7% from low 5%, you have 2% increase. House prices have to drop at least 20% to keep in pace with Interest rate.

So, even if house price drop 20%, the net monthly mortgage will remain same as interest rate has gone up

Anonymous said...

Here's a better eample:

1
1
1
1
2
________ median
200,000
300,000
500,000
600,000*
1,000,000

The median price in this city is $200,000


I don't think so. it would be (200,000 + 2)/2=100,001 because the median is between 2 and 200,000 so you pick the middle.

g said...

"Rates always go up to fight inflation. "

Ummm, are you kidding me? Have you seen the divergence of the cooked "core CPI" number the Fed bases their policies on vs. the real rate of inflation that includes food and energy?

Listen to Ron Paul man! We are being subjected to a massive inflation tax already! The Fed is already citing a "decreasing core CPI", likely setting the stage for a rate cut later this year to appease Goldman Sachs and JP Morgan, i.e. the people who really run the country and own us all!

If you think the Fed is dedicated to fighting inflation, all I gotta say is "WAKE THE F*** UP"!!!!!!!

Anonymous said...

The post above is correct in the case of 10 data points. Another example with 11 data points instead of 10:

1
1
1
1
2
50, 000________ median
200,000
300,000
500,000
600,000*
1,000,000

The median price in this city is $50,000. It's what's right in the middle. The mean or average price would be $240,909. The mode would be $1.

In a bubble market such as Phoenix circa 2004/2005, the median would be going up. So the snapshot of the current median reflects that 50% have to date paid more and 50% have paid less than 50k. This does not mean that 50% of FUTURE buyers will pay more and 50% less.

Anonymous said...

The most important analysis is to compare median incomes with median home prices. This might raise a few concerns so this is not a popular comparison. For example the median income in Los Angeles County for a family is around $40,000 and the median home price is around $500,000.

You have to wonder how folks can afford a home in Los Angeles. Keep in mind that Los Angeles pays higher salaries than most cities to attract workers.

Paul E. Math said...

What we're looking for is an accurate indicator of where prices are in comparison to where they were. Are they up? Are they down? By how much? The median doesn't do a very good job of this.

The S&P Case/Schiller is the best measurement. You can find a 40-page description of their methodology here:
http://tinyurl.com/36a7rd

Here's the data:
http://tinyurl.com/35q2kg

Anonymous said...

Looks like someone got stuck in a 500k McMansion.

All those "blacks and mexicans" in the 150k homes that go to 100k will likely be better off in the end. Why?

Where is our population growth coming from? It isn't white folks. If it wasn't for immigrants, our population growth would be negative.

The builders created oversupply in which market during the last 5 years? It wasn't the low income market, margins were considered too low. It was the luxury market. all those 300k+ McMansions sprouting up in cornfields and replacing cute little cottages.

So now we have a shrinking middle class, a rapidly growing lower class and an oversupply of granite and stainless steel appointed starter castles. Do the math, anon 11:21 AM. Those WASP wannabes are going to take it up the ass.

Anonymous said...

interesting. i see it working the other way round here in the uk. all we hear about (from the industry's own surverys dutifully reprinted by an unquestioning press) are mean prices, and, with first time buyers largely priced out, most of the action is at the upper end of the market. thus the mean keeps rising even if the median is going nowhere.

Anonymous said...

For example the median income in Los Angeles County for a family is around $40,000 and the median home price is around $500,000.


No it isn't. Get your facts straight then try again.

Anonymous said...

According to Shiller index Las Vegas is down 2% from May 2006 peak. And since 2000 it is 129% higher.

This is the great housing crash I keep hearing about?

Anonymous said...

6:44am,

I guess you know best about blacks and mexicans since you live among them in your rental. Only mexicans and blacks I see are the garbage men on my route and the gardners, poolmen and maids taking care of the homes where I live in my wannabe WASP area. The houses in my wannabe WASP area - adjacent to a country club that has an initiation fee of $45,000 - were built in the late 70s and early 80s and for the most part are paid off.

But you keep telling yourself the prices will fall by 50% if it makes you sleep better. I can imagine the constant sounds of ghetto gunfire keep you up at night.