Does Median Price Matter?

This is Russell Shaw on the Bloodhound Blog the other day:

Using the median sales prices of an area (which almost all economists and others doing sales data analysis seem to want to do) may be quite useful in determining which city has the best (or worst) affordability. Median sales prices have no meaningful value if used to determine short-term movement of home prices. NONE. The median price of a home can go down and that does not mean that the actual selling price of any home in that area went down even one dollar! The median price can go up and it does not even begin to suggest that "the prices went up". Everyone who thinks otherwise is wrong.

This came up for me in a couple of conversations lately with people looking to buy homes in the Boise area.  Their primary concern is that if they buy now, "what if the median price goes down again... won't that be bad for me?"  I explained to them that the median price number makes for interesting news on the evening TV, or the weekend newspaper, but it really has nothing to do with the home that you are looking at to buy today.  It does not measure home prices, it measures the statistical distribution of the homes that sold.  It merely shows that half of the homes sold for more, half sold for less.  Around Ada and Canyon counties in the first of the year, a number of the 'volume', 'value', and 'median priced' homebuilders had what can only be described as inventory reduction sales.  The median price for homes went down, but that does not mean the value or price of every home went down.  To determine the market value of a home, you compare it to its market, not "the market".

As an example, I did some price comparisons for a gentleman who is soon to close on a home in a newer sub, built by one of our large builders.  The home he is in contract for is a standard plan, being built in more than one area of the county, so it is easy to compare.  It is also easy to judge the timing and the pricing of the home that he bought, in the context of what was happening with that builder at the time he went under contract.  His timing was wonderful, as he probably caught the last of the inventory adjustments this builder was making.  The builder has a number of new builds going in his subs all over the county, that were started shortly after my contact went under contract for his.  He got his home below current list for the new inventory, and much below what it was closing for last summer.  Would that we could all buy so well, eh?

The median price going up or down will not directly affect these customers, nor will it tell what the current market value of their homes might be.  That can only be determined by comparing houses to houses and neighborhoods to neighborhoods.  Just as you cannot tell what your little stocks did by what the DOW did today, so you cannot tell what your home value is by what the "median price" did last month.