Any statistician will tell you how easy it is to manipulate numbers. As a former scientist, I can attest to the fact that one can present data (i.e. results from one’s research) to support either side of an argument. Tell me what you want to demonstrate, and I’ll find a way to present the numbers to back up that claim.
Housing Stats in the Media
These days, we are being inundated by reports in the media about the housing crisis. One hears about
- the increasing numbers of foreclosures, REO’s and shortsales
- the decreasing total numbers of sales, or “units”
- the decreasing home values in various markets
I’m no statistician, but my background in the sciences has made me hyper-aware of how misleading numbers can be. Here are some of cautionary thoughts.
The Importance of Normalizing
When referring to numbers increasing or decreasing, I always wonder how careful the reports were in normalizing the numbers. In other words, if 10 houses went into foreclosure in a given market A, while only one did in 2005, one has to know whether are still the same total number of homes in market A. One foreclosure out of 500 homes vs 10 foreclosures out of 1000 homes is not a 10 fold increase, but a five fold one.
The Difference between Average and Median Sold Price
Some seem to use the terms interchangeably. Some suspect there’s a difference but don’t know what it is. The median sold price means the middle value in a set of prices arranged in increasing order, i.e. the middle price in a batch of home prices, where half are higher than this number, and half are lower. To calculate the average, all sold prices are added together into a sum, and the sum is then divided by the number of houses that sold. Which is more relevant? The median, because it tends to neutralize aberrant homes that fall way off the curve. For example, if 4 tract homes sold for $490k, 495k, 505k, and 510k, and one unusual custom home in that neighborhood sold for $750k, the average sales price would be $550k, while the median would be $505k, which is much more representative of the values in the neighborhood.
Generalizing from Changes in Median Price
Even when using the more representative median, I am often blown away by the assumptions people make when looking at shifting trends in home prices. If the median price in a given neighborhood went from $800k in 2005 to $600k in 2008, it does not necessarily mean that prices declined by $25%. A different explanation could be that in 2005, the largest floorplan was selling the most frequently, while now, the smallest floorplan is the most popular seller. The same is true when we hear stats of a whole city or community, like Del Mar Real Estate. Though the median home price may look like it has gone down, perhaps this decline is simply a reflection of the fact that more of the lower end, entry level Del Mar homes are selling now, the tear downs and fixers. The real question is whether the price a specific given home would have sold for in 2003 is different from what it would sell for in today’s market.
The Bottom Line
I am not trying to argue that home values have not declined here in Del Mar, but simply to say that we need to take these stats with a grain of salt. As I mentioned, the numbers can be presented in such a way as to support any agenda. For the media, negative stories sell! That’s a pretty powerful agenda…
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