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When Price Increase Is Not Price Increase

Contributed by mm | August 20, 2007 2:37 AM PST

Earlier this week, the National Association of Realtors (NAR) published its quarterly survey of the national's real estate market. It is not surprising that the existing home sales declined more then 10 percent over last year, but what really makes the news is in almost two thirds of the metropolitan areas, median price of single-family home has year-over-year appreciation.

From the NAR news release:

Home price trends are improving in metropolitan areas but existing-home sales during the second quarter were below a year ago in most states, according to the latest quarterly survey by the National Association of Realtors.

In the second quarter, 97 out of 149 metropolitan statistical areas 1 show year-over-year increases in median existing single-family home prices, including nine areas with double-digit annual gains; 50 had price declines; and two were unchanged. In the first quarter of 2007, revised data shows 83 areas had annual price increases, while in the fourth quarter of 2006 only 68 areas were up.

Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate of 5.91 million units in the second quarter, down 10.8 percent from a 6.63 million-unit pace in the second quarter of 2006. Six states showed increases in the sales pace from a year ago; one was unchanged and complete data for two states were not available.

How can this happen?

Seattle Bubble blog discussed why median price is not telling the whole truth about market price:

The shortcomings of the median price as an indicator of actual price changes have been discussed here before, but typically in a hypothetical sense. For instance, we know that if low-end home buyers stop buying homes, while middle and high-end buyers keep buying, the median will increase. However, in the past we have not been able to observe this happening in King County via the data we have available to us. As you are about to see, I believe that is no longer the case.

In the same post, The Tim from Seattle Bubble was able to demonstrate that the higher-priced East Side represents a much higher percentage of sales lately while the share of cheaper neighborhoods in the South is tanking. This should explain most, if not all, of the median price increase in similar surveys:

So how much of the increase in King County’s SFH median can be explained by shifting sales patterns, rather than actual rising home prices? Before February of this year, I would have said “none.” But with Seattle’s share of the total homes sold in the county showing a steady increase, South County sales experiencing a steady decrease, and Eastside sales taking a sudden spike in July, I am now much more inclined to say “quite a bit.”

Another ancedotal example: I have been tracking the home value in my ex-neighborhood since I sold my house approximately two years ago at $430,000. While the price of identical houses had once fetched $510,000 in late 2006, now there are four houses sitting in the market with a listing price of $490,000, and a couple of them have been listed for over 50 days. Well, I'll wish my ex-neigbors best of luck in their sales from this side of the Pacific Ocean.

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This Post Has Received 3 Comments. Share Your Opinions Too.

Q-Ball Commented on August 20, 2007

Some areas actually are still appreciating although those are probably rare.

I think there may be a problem here with the fact that the measuring stick is medium home prices. It doesn't have the ability to tell you if the houses that are selling for 2% more than a year ago are the same size, & quality of houses.

For instance, many home builders in there desparation to move product in the slow down, started offering many free upgrades for no extra charge. So rather than drop the price they added 10,20,30K of upgrades to move the product at the same price. That keeps the median price up but its not really comparing apples and apples.

For existing houses I don't know what is happening but it is possible that the current situation has squeezed the low end buyer more than the high end buyer so that the houses that were over the median price may have drop in price but sales of those have only dropped lets say 5% where as houses on that were below the median price also dropped in price but the number of those sold could have dropped lets say for example 20%. Thus even though the whole spectrum may be down in price the median can skew higher because the mixture of houses sold is more heavily weight to the high end than it was last year.

Again, I have no evidence that is true, but it would seem plausible in this market and it would be capable of causing the median price to go up even if all prices went down.

I am not sure how to get an apples to apples comparison where you can see if a basket of houses sold for X last year, what would that exact same basket sell for this year. Does anyone know how to get such a comparison?

Q-Ball Commented on August 20, 2007

In my comment I see I used medium in a place or two where I meant median. If its read as medium it doesn't really make any sense (even though a medium house is probaby pretty close to the median house. :) )

Meg Commented on August 24, 2007

Real Estate trends are one of the easiest places for people (especially the media) to twist statistics to say whatever they want them to say. Besides, the large bubble markets skew any reference to national averages or trends.

I think it's important to remember that decreases key statistics like mortgage applications, median home prices, or anything else are not necessarily a cause for concern. When you're coming off a record year, for instance, the market can still be booming even if those key stats show sharp decreases! You have to look at historical trends and averages, not just what's happenning now compared to last year or last quarter.

PS-thanks for visiting my blog! I am glad I stumbled on yours; I'm going to put a link to it on my site. Also, I responded to your comment on my net worth/my real estate post if you want to check it out. Keep up the good work!

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