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Now that this month’s housing data has arrived, I thought it would be a good time to briefly review the trouble with the “median price” as a measure of real estate pricing power.
Many observers, noting that the median home sale price was 2.2 percent lower in August 2006 than in August 2005, would assume that the typical home is now worth 2.2 percent less than it was a year ago. But this assumption is not necessarily correct. Because while the median price is a decent measure of how much the typical buyer paid, it does not tell us what that typical buyer got for the money.
When it comes to measuring actual changes in home market values, the median price can be thrown off by the following:
- Incentives. San Diego developers routinely offer buyer incentives – televisions, cars, homeowner fee waivers, and more – of up to $30,000. These giveaways overstate the actual price being paid for the homes themselves.
- Changing purchase patterns. Although I have not verified the numbers myself, I have heard several realtors claim that the so-called “low end” has slowed more drastically than the rest of the market. If true, this would shift the distribution of sold homes prices upward and cause the median price to rise more (or fall less) than it would have otherwise.
- Bang for the buck. It may simply be the case that a given amount of money will buy a larger or nicer house this year than it would have last year. If buyers are spending the same amount of money but getting nicer houses, this represents a real-world price decline that is not reflected in the median price.
The median price does provide a rough idea of what’s going on with home prices, but real estate pundits rarely seem to acknowledge just how rough it is. This is something to bear in mind as you read this week’s onslaught of housing analysis.