FORGET MEDIAN AND GET TO THE REAL NUMBERS OF WHAT HAS SOLD OR IS LISTED.
I am disgusted each and every time I read a government or "expert" advice published median price report for home values, traffic, solds, listings, etc.
The information is completely useless and misleading to the consumer.
Richard Rector said what I have thought many, many times. Listen to the man.
I have actually had buyers indicate that they would make offers based on median prices for the area. HA. That is usually a good 20-30% below market and averages.
Median prices reflect an exercise in arithmetic, finding the middle of a list. Market values reflect an aggregation of data and then using the data to develop a value that reflects market activity.
When was the last time a home sold for the median price for the area??
Median prices are mindless. Perhaps that's why the government relies on them so much.
EXAMPLE: Below is the April market report information for Montgomery County, MD.
| Average Sold Price: | $ 426,182 | ||
| Median Sold Price: | $ 337,975 |
How many sellers are going to sell for median price???
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In a discussion with a very wise colleague, he pointed out that the median pricing reports are not truly identifying values of all properties and is actually distorting valuations. The reason for this is that one segment of the market (the higher-priced homes) is not really "open for business" due to the lack of jumbo loans. This means that the median price reports skew to the lower priced houses, which are the majority of most markets right now.
He described it as a "product-mix change" in the market, rather than an overall drop in values. In other words, in a market that once had 40% of its sales above $700,000, and now only has 5% of its sales in that price range, the median price drops, but the value of the $700,000 house does not drop at the same rate.
Many consumers read these reports and have the impression that their house value has dropped a lot more that it really may have. If someone bought a $2 Million house 3 years ago, and the median prices of homes in the area have dropped 50% in the same time frame, that house is not necessarily worth only $1 Million now. I contend that its value is much higher because the median pricing reports have an abundance of low-priced homes dragging the median down.
I am curious if you agree with this thinking, and if so, how are you explaining it to buyers and sellers of more expensive properties?
Let me know what you think.
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I agree with your view. Median price of homes sold can be distorted. Good post.
Lenn, Great post from you and Richard. It is amazing how buyers sometimes come up with the amount they want to offer on a house.
Lenn...
I was just titoring a young student this week about thge difference between "average" and "median." How interesting that you brought it up!
I was having this conversation last night with a prospective seller. They felt the value of their home was far worse than what it might be based on all of the market reports they were reading (not mine). When I suggested that it might actually be worth X based on true market data they were floored. X being a postive number and not a negative number!
Lenn, Only two maybe three houses can possibly come close to hitting the median point dead on. Some people try the same thing with price per square foot...
The median price shows up in all our market stats in the mls and I never use it when preparing a market analysis.
"Average" and "Median" many of the consumers don't know the different.
They seem to understand average better and that's what I publish. They still need talk to local professional about specific market trend, pricing, etc.
Good point Lenn. From month to month the median home price can vary quite a bit.
Average prices and median prices and all others are an exercise in math. They are no indication of a particular home and it's value. That's what we're for!
The only way that median numbers work is if you have a very homogeneous set of homes. But that's very rare except in newer cookie cutter neighborhoods. I live in a an older neighborhood so homes are in various stages of having been renovated. They range from $350,000 to $650,000. Once in awhile you'll get three or four in the low range all sell about the same time. Just because the cheaper homes in a neighborhood are selling doesn't mean the prices for all the homes in the neighborhood have come down.
Lenn, median value doesn't mean a whole lot except for the properties that are at the median value. Now if they would provide the Standard Deviation in their statistical analysis, we might be able to make some sense out of it. LOL
It is amazing what buyers come up with when it comes to real estate. We do a lot of education when it comes to the buyers. Again, we wear many hats to close the deal.
I always use a licensed realtor in every transaction for this reason. I am not the expert. I want someone to CYA me
If everyone sold for the median price then the median would become the average and...We put way too much weight into median anything!
If a person wanted to buy the home for the median price in an area, I would tell them "You mean you only want to look at homes on the bottom end? Because that is what is selling. Distressed homes withmold, foreclosures with feces on the floor and they are built on the road and under power lines. Whey they ask why would I say that, "It's because that is where about 60% of all sales are coming from these days!"
I agree, we don't need to be looking at the median prices. I would go one step furthur and say lets just use the actual figures but will accept the average over median any day.
Lenn - it becomes even more meanigless when the sample size is small. And the average? With some areas that, too, is not useful and can be distorted if there are few sales. 3 low end condos and one oceanfront million-dollar-plus = an average above the sales prices of any of the condos. But then they aren't comparable, except perhaps in size.
Jeff
Hi Lenn, I agree with you , median is especially useless when every home in an area is unique and unlike any other. Compare apples to apples -- the median price is just like a giant fruit salad; with all the homes tossed into the same bowl.
Lenn,
Great post! I agree that statistics I hear or read rarely ever relate to values in our area!!! The buyer is the best determiner of sale price! Thanks, Fran
As a psychology professor I try to explain this to my students all the time. For the most part the median is a useless statistic. It tells you nothing about the 50% that are either above or below the number. I am amazed at how many industries rely on the median for information.
Stacey. Thanks very much. I agree completely.
I love it when someone quotes a median anything to me. I ask, "When was the last time a seller was willing to list for the median price??"
Fran. Yes, the buyer finally decides. They'd be happy to pay median price in my area.
Mary. That's good. I see I'm not the only one.
Jeff. Thanks. Yes, we have one county whereby the median and average prices are meaningless because there isn't a sufficient number of transactions.