What are prices really doing - a brief discussion of common real estate metrics

How's the market?

As an agent, we get asked this question probably more often than any other.  It seems so straightforward, but is it really?  Here are my thoughts as to how we should think about this question, how it's typically answered, and a brief discussion of housing metrics and how you probably need to "critically" think about them.

So, HOWS THE MARKET?

Well, the first thing we need to ask, is whose market are we talking about?  Basically, there are 3 markets (but they have lots of sub markets).  There's buyers, seller's, and of course, my (or another agents) business.  It's commonly assumed (incorrectly) that rising prices is a good market for all concerend, and falling prices is not.  Well, rising prices are good for sellers, typically, bad for buyers, typically, and you can't really tell much about an agents business by prices.  An agents business depends on VOLUME, so typically we are profitable during periods of real estate activity regardless of the direction.  (And in case you're wondering, we're at 10 year transactional lows in my area.  Yikes!).  But we'll leave this for another day.

So, HOWS THE MARKET?

Well it depends on what prices are doing.  Typically, to answer that question, most newspapers publish the "median sales price".  Well, what is that?  The median sales price is the price of an Area (National, statewide, or local, for example) at which the "middle" house sold.  It's not an AVERAGE, which is the sum of all the sales prices divided by the number of houses, but the Median, the middle house.  So if there are 101 house sales, the median is the home that is the 51 most expensive, or in this case, also the 51 cheapest.  So, why do we use the median.  In truth, I don't really know, but I suspect for the following:

A) It's easy to calculate

B) It's always been done that way, so that's good for year over year, or decade or decade comparisons.

I think it can certainly be representative of prices over a long term.  But are their problems with the median over the short term?  Well, I think the answers are yes, yes, and YES!!  As agents we know that the different parts of the markets move at different times - sometimes, the lower end moves, and sometimes the higher end moves.  This, I'm sure, has a lot to do with various factors, interest rates, interest rates on jumbos, the stock market, tax policy, the economy, etc.  Let's take today for example:  Jumbo's are expensive today relative to 'conforming' loans, and the stock market is down.   So one would expect that the upper end of the market in a given area, like Metrowest, might be suffering.  That, in fact, is what we see.  The luxury market is not moving well at all - there aren't enough buyers to support prices.  When jumbos got cheap last year (and before the stock market plummetted) we saw a number of high end properties sell.  So what's this all mean?  The median home prices in this area have been really whipsawed, and moved a lot.  The move up in the spring made the move down in the fall all that much more dramatic, but I think things really didn't move as much as they looked according to the median. In small towns, the median can move so much as to be effectively worthless in understanding what underlying prices are doing. In general, you need to look at more months, and have sufficient volume to really have effective medians, but they aren't good to use for a retail buyer.

Next time I'll take a shot at my lease favorite metric:  Year-over-year volume sales, and perhpas have time  so that we'll take a look at my proprietary price estimator, and see if it does any better.