Saturday, January 17, 2009

Beware the Median Price Deception

As much as they would have you believe that home prices act like stock prices, don't buy it!

When a stock trades at a certain price (let's say, Google at $300 per share), all shares are valued at the current price. Hence, the "fair market value" of each of Google's approximately 315,000,000 shares outstanding equals $300.00.

However, not all homes sell each month. Determining the fair market value of a home becomes more of an analytical challenge.

In December, 676 single family homes closed escrow in Santa Clara County. The calculated median price (half above and half below or the middle transaction) came to $512,450. The figure is calculated on just what closed escrow in December, not a figure you can assign to all homes.

In the second half of 2007, when the sub-prime loan issues started to surface with a vengeance, the sales of lower-priced homes decreased significantly as a percent of the total homes as the mix of higher-priced homes expanded. What did this do to the median price? It jumped upwards!

Currently, we've witnessed a flurry of activity in the sales of lower-priced or affordable homes including bank-owned and "short sale" (preforeclosure) homes. This is the exact opposite affect of what occurred in the later part of 2007, as the percentage of lower-priced homes make up a greater percentage of the total closings which dramatically decreases the median price. We can estimate that if the mix of homes had remained the same, the median prices would have fallen about one-third of the amount of the total decrease. That means about two-thirds of the fall in the median price is due to the mix shifting toward the lower-priced homes.

My point is that median price statistics should not be used in isolation but in conjunction with well-researched and analyzed transactional data available to your friendly Realtor.

Understanding the shifts in the markets and changes in trends (the whys) form a major part in formulating the appropriate strategy your Realtor uses to advise clients on their purchase or sale in terms of timing and determining what I call the "relevant range" of fair market values.

For an update on the current market trends in Santa Clara, San Mateo, Santa Cruz and Monterey counties, please click on my January Silicon Valley Market Update.

Thanks for reading!

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