Median as Market Price Measurement

Do you understand and trust the measures of market prices? Today we will explore the median sales price as a measurement of market prices.

14951 Sumac Ave Irvine, CA 92606 back

Irvine Home Address … 14951 Sumac Ave Irvine, CA 92606
Resale Home Price …… $720,000

Cause I was born lonely down by the riverside
Learned to spin fortune wheels, and throw dice
And I was just thirteen when I had to leave home
Knew I couldn’t stick around, I had to roam

But I got to ramble (ramblin’ man)
Oh I got to gamble (gamblin’ man)
Got to got to ramble (ramblin’ man)
I was born a ramblin’ gamblin’ man


Ramblin’ Gamblin’ Man
— Bob Seger

Is everyone ready to gamble on the housing market again? Are prices going up again? Are you sure?

Median as Housing Market Price Measurement

There is no perfect measure for any broad financial market activity.
Markets for stocks, bonds and other securities are the most widely
reported and measured financial markets. It is relatively easy to
measure activity in these markets because all sales are recorded at a
few central exchanges and the “products” are uniform (one share of
stock is equal to another). In contrast, real estate markets are much
more difficult to evaluate. Real estate transactions are recorded
into the public record in thousands of locations across the country.
Keeping an organized database of these records is such a daunting task
that the title insurance industry has taken this responsibility as part
of its business model, and many people are devoted to the arduous task
of obtaining and organizing these records on a daily basis.

Real estate
does not have the uniformity of stocks or other financial instruments.
Each property has unique qualities that differentiate it from all other
properties making like-kind comparisons very difficult. Geographical
location is a major influence on the value of real estate. Even if two
properties could be found with identical physical characteristics, the
values of these properties could vary considerably based on where they
are located. Ideally, a market measure would record the changes in
sales prices of identical assets or in the case of an index, a group of
similar assets. The unique nature of real estate assets makes it
difficult to use standard measures of reporting utilized in other
financial markets.

Due to the problems of asset uniformity and variability based on
location, real estate markets are typically measured using some form of
median pricing over a specified geographic area. The median is a
statistical measure of central tendency where half the data points are
above and half the data points are below. For instance, in a list of 5
numbers sorted by size ($100,000, $200,000, $300,000, $500,000,
$900,000,) the third number in the list ($300,000) would be the median
because it has two numbers that are larger and two numbers that are
smaller. The median ($300,000) is used rather than an average
($400,000) because a few very expensive properties can increase the
average significantly, and the resulting number does not represent the
bulk of the price activity in the market.

Median Home Prices, 1968-2006

Median Home Prices, 1968-2006

Median is Not Perfect

One of the problems with a median as a measure of house prices is a
lag between when a top or a bottom actually occurs and when this top or
bottom is reflected in the index. During the beginning of a market
decline, the lower end of the market has a more dramatic drop in volume
than the top of the market. This causes the median to stay at
artificially high levels not reflective of pricing of individual
properties in the market. In other words, for a time things look better
than they are.

Then as the price decline takes hold, transaction volume picks up at the low end and drys up at the high end. The flood of low-end transactions at much lower price points makes the median snap back and make the decline look worse than it really is.

Finally, as the price decline wears on, transaction volume will begin to accelerate at the high end — at much lower price points. This activity is still above the median, so the median moves higher whereas prices are actually moving lower.

At the beginning of a market rally, transaction volume
picks up at the bottom of the market at first restarting the chain of
move ups. During this time, the prices of individual properties can be
moving higher, but since the heavy transaction volume is at the low
end, the median will actually move lower.

With all variability caused by changes in the product mix, the median is a poor record of market tops and bottoms, and it is prone to show a direction of market prices that is incongruous with what is happening with individual properties.

Other Distortions of Median

The median has another significant weakness: it does not indicate
the value buyers are obtaining in the market. The houses or structures
built on the land compose the most significant portion of real estate
value in most markets. These structures deteriorate over time and
require routine maintenance that is often deferred. During times of
prosperity, many people renovate homes to add value and improve their
living conditions. The impact of deterioration and renovation of
individual properties is not reflected in the median resale value.

Also, at the time of sale, there are often buyer incentives which
inflate the recorded sales price relative to the actual cost to the
buyer. These buyer incentives also distort the median sales price as a
measure of value.

Median is the Best We Have

With all these distortions of market reality, it is a wonder the
median is used at all. Winston Churchill noted, “It has been said that democracy is the
worst form of government except all the others that have been tried.” The same is true of the median. We use it not because it is perfect, but because it is the best available for the task. Despite its weaknesses, distortions in the index
are not extreme, and it is the best tool available that provides a
meaningful number.

Tomorrow, we will look at Alternate Market Price Measurements including the more reliable S&P/Case-Shiller Index.

14951 Sumac Ave Irvine, CA 92606 back

Irvine Home Address … 14951 Sumac Ave Irvine, CA 92606

Resale Home Price … $720,000

Income Requirement ……. $132,518
Downpayment Needed … $144,000

Home Purchase Price … $41,500
Home Purchase Date …. 4/25/1973

Net Gain (Loss) ………. $635,300
Percent Change ………. 1634.9%
Annual Appreciation … 8.2%

Monthly Mortgage Payment … $3,092
Monthly Cash Outlays ………… $4,030
Monthly Cost of Ownership … $3,010

Redfin Property Details for 14951 Sumac Ave Irvine, CA 92606

Beds 4
Baths 2 full 1 part baths
Size 1,873 sq ft
($384 / sq ft)
Lot Size 5,500 sq ft
Year Built 1972
Days on Market 3
Listing Updated 10/6/2009
MLS Number S591760
Property Type Single Family, Residential
Community Walnut
Tract Cp

Fantastic 2 story home located in the very desirable College park community. Enjoy this very open floor plan featuring 4 BR, 3 baths, formal dining room, very large living room and family room with view of pool. The home is extremely clean and has been very well maintained, new paint throughout much of the house, professionally cleaned carpets, and fantastic large backyard with pool for entertaining. Also enjoy the great association pool located just down the street from the property.

I must admit, this one made me sad when I reviewed it. When I saw a discretionary seller from 1973, I hoped I would find a property with zero debt. They bought 36 years ago; surely they paid it off by now, right? Well, this is Southern California

By 2001, they had the debt up to $231,000. By the time they stopped borrowing in 2006 when they took out a 1-year ARM for $340,000. WTF is a long-term owner doing with a $340,000 1-year ARM? Sophisticated financial management?

I guess this won’t be a short sale as this is about a 50% LTV. I was hoping to profile a celebration of zero debt, and instead I find $340,000 worth of HELOC abuse. It is sad… 🙁

49 thoughts on “Median as Market Price Measurement

    1. Chris

      Let me play the devil’s advocate (hmm…I think I have been doing so recently) and say that 92% are NOT in that category.

      Unemployment (U6) is around 20%….but that means 80% are employed.

      Oh well, no SHTF yet….they’re all hiding in the banks’ balance books 🙂

    2. wheresthebeef

      Good god, are these people in Washington this blind and ignorant:

      David Kittle, chairman of the mortgage bankers group, said an increase in the minimum down payment would be “catastrophic” for the market.

      “Why would you want to deter people further from buying homes when clearly you need to get homes off the market?” he said.

      Some members of Congress, however, believe the risk may be too high.

      “I’m concerned that the private market for loans with little or no money down has shifted directly onto the books of the federal government,” said Rep. Ed Royce (R-Fullerton). “We need to make certain that taxpayers are not again on the hook for the failures of Washington.”

    3. Lee in Irvine

      When is the government gonna stop this stupid shell game. They cannot support a real estate market that has been artificially pumped up with ponzi scheme mortgages. There are no fuc*ing mulligan’s in economics, and this is the reason why we’re suppose to use history to prevent debacles like the one we’re dealing with now. Idiots that start talking new economic paradigms (REIC, Stock Market Analyst, CNBC, etc) should be offered a last meal.

      Now back to the FHA subject … This is not rocket science people. Make them put 20% down, or don’t giv’em the fuc*ing loan!

      I don’t know if anybody posted this last week, but it was posted on Calculated Risk:

      FHA Shortfall Seen at $54 Billion May Lead to Bailout

      (can u even believe this shit?)

      Oct. 8 (Bloomberg) — The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because it has $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

      “It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

      The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

      What a joke this is turning into!

      1. Walter

        “no fuc*ing mulligan’s in economics”

        True, if you are talking about the economic system. Problem is people and companies do get mulligans. The government is bailing out the politically connected at the expense of the responsible. Pisses me off like you will not believe. I have been waiting to buy a house since 2005. I have no idea what to do, buy at the risk the government stops meddling and lets prices fall after I buy, or wait and run the risk the fed inflates away my cash down payment.

        I am watching my hard earned tax dollar being used against me. That sucks. And I will not get a mulligan because I am not hooked up with Dodd and Frank.

        1. Chrissy Dodd Hater

          Little off topic, but since Dodd was mentioned. This guy who got a $75,000.00 break on his mortgage (bribe) from CountryWide is now mentioned constantly by Obama for being a major player in Health Care and as a leader in Finance. Obama knows Dodd is a crook, but will support him because Dodd’s seat is in jeopardy in CT in 2010. Dodd who already oversaw and is responsible for the mortgage crisis is the reason we cannot determine if we should buy our first homes or not. How can we trust the market when the market has been, and is going to be again, manipulated by our politicians. We can only hope that the people of CT dump Dodd. His 30+ years of service as a Senator has been abused and all of us across the country has suffered because of it.

  1. winstongator

    Especially looking at short time windows where your selections can greatly skew the median, median sale price is not a useful indicator. Case-Shiller has a lot of research behind their methodology and I’m looking forward to it tomorrow.

  2. Geotpf

    I think using $/sq ft is a better measure than median home price, because typically more expensive houses are also larger. Obviously, location and condition have something to do with it as well, but $/sq ft seems to scale pretty well excluding those (that is, a 1,000 sq ft property in the same condition and general location as a 4,000 sq ft property both tend to have about the same $/sq ft, although the second would have an overall price of four times the first).

    1. IrvineRenter

      Dollars per-square-foot is a useful measure. Changes in trend will be noticed here before they are picked up by the median. It is a good leading indicator.

      House prices on a $/SF basis tend to get less expensive as they get larger — at least in a normal market. The expensive square footage in any home is the kitchens and bathrooms because of the fixtures, plumbing and special flooring. A large home is mostly inexpensive bedrooms and living spaces, so the $/SF declines as homes get larger. The reason builders put up so many McMansions during the bubble is that sales prices on a $/SF basis were not much different based on unit size, and since the large stuff was less expensive to build, they made more money. More money equals more McMansions.

      Since the bubble made financing so much easier, prices at the high end were pushed skyward, and they have been floating in the clouds ever since. There will be significant compression in this difference before move-up buyers can push up prices again.

      1. Dejnov

        Hey Irvinerenter,

        Can you do a post/analysis on what is the approximate $/sqft costs for home size? I’m hoping to buy in the near future (2012) and want to be able to realize a good deal when I see one. An understanding of $/sqft trending would help immensely.

        Ex: Square footage for kitchens, first two bathrooms is full sqft value, while first couple of bedrooms and 3+bathrooms are 70% of full sqft value, and subsequent bedrooms are 50% of full sqft. So a 1000 sqft house w/ 2 bdrms (300sqft)/ 2 baths would be approx. 910 sqft of premium space and a 2000 sqft 4 bdrm (500 sqft) / 3 bath (150 sqft)is approx. 1700 sqft of premium space…

        Dejnov.

      2. tonye

        Yes, I too think that the price per square foot it the best indicator.

        It works rather well with homes in similar sized lots. And you can usually fudge it just a bit for smaller/larger lots and houses.

        Indeed, you can go further and do an analysis based upon the size/complexity of the kichen and the ration of bedrooms to bathrooms. That is, a small house with 2be/bath and a smaller kitchen will likely go for the same $/sqft than a larger with the same ratio…

        So, when I see homes like this asking fr almost 40 bucks per square foot I think they must be nuts.

        1. Geotpf

          Interestingly, the size of the lot tends to have a much smaller effect on value than the size of the house. Hence the trend of builders building big houses on small lots, since that’s how they can maximize their profits per acre.

    2. WaitingToBuyByAndBy

      From some of your posts in the forums, you have convinced me to look at $/sq ft as a very reliable gauge.

      I think you would agree there are aspects that must be considered (location, total square footage, etc.) but I think I’ve learned that $/sf is a great tool for weeding out absurd listings.

      I would suggest $/sf is a better market measure than the median price.

  3. MalibuRenter

    I am quite surprised that you don’t think Case Shiller is a better indicator than the median.

    1. WaitingToBuyByAndBy

      From IrvineRenter’s post:

      “Tomorrow, we will look at Alternate Market Price Measurements including the more reliable S&P/Case-Shiller Index.”

      One downside I hope IR touches on is how CSI might be inaccurate in the absence of repeat sales.

      That is, when the market freezes and sales volume drops significantly, there is a much smaller number of repeat sales. Does this smaller sample size match the current market, or is it possible the sample size gives a different answer.

      I don’t know if CSI considers foreclosures or distressed sales as “real” sales. If they don’t, then the CSI will be definitely skewed from what is really going on. If they do, than the CSI will show accurate ups and downs without showing the actual state of the marketplace (whether the market was healthy or in crisis).

      Overall though, by equalizing units (using repeat sale of the same house) the CSI captures home appreciation/depreciation best.

    2. IrvineRenter

      Case-Shiller is a better indicator of market price direction than the median is, but since it is an index number, it doesn’t give you a number you can easily relate to price.

      1. DirkDigler

        Imagine where home prices would be if real estate markets were complete… where you could not only take a long position, but a short as well… where you could buy a put (or sell one)… Imagine how fast people would start selling homes into a rapidly distressed market as people see their homes dropping in value immediately. Luckily for existing home owners that the market is biased in one direction. If sellers don’t like the price… stay living in their property… or better… stop paying and give the home back to the bank.

      2. MalibuRenter

        As long as you pick a common starting point (like Jan 2000), you can use the CS index for a fairly long period of time without trouble.

        What is missing is the appropriate price for homes built since 2000 that have not been resold. If those homes are very different from existing homes, the CS index might not be as good an indicator of price.

    3. winstongator

      I read somewhere that case-shiller doesn’t include the new-home to first existing home sale in its index. Say a home sold new for 1M in 2006, then 500k in 08, wouldn’t influence the index.

      There should also be a weighted index for the whole housing market.

      It is still sad that so many felt that rising prices were inherently good. Why were rising prices a curative to having larger mortgage payments?

      It goes that way for the stock market also. If you’re actually interested in getting a real return through dividends, shouldn’t you be at least somewhat interested in not overpaying for access to those dividends?

      1. MalibuRenter

        At the risk of doing too much stat, you could adjust the mix of homes in various ways. You could adjust for square footage, bedrooms, etc.

        One of the problems with the CS index is that when homes in a particular area, or of a particular type, just stop selling, there isn’t data. I think I could probably fix this, but it would cost S&P (who now does the indexes) some real money to have me set it up.

      2. norcal

        I think you have to track new and existing homes separately. There’s a premium for new ones, just as there is for cars. RE prices need something like Kelly’s Blue Book for used homes.

  4. newbie2008

    The no absolute rule on condition and ammendaties on the house. Some general rule of thumb are:
    1. Large sf give more ammendaties while keeping sf cost roughly the same.
    2. RE appreciation is in the land, not in the building.
    3. Building is what sells a house in the short term.
    4. Location is what keeps the price up in the long-term.
    5. Medium is the best single gauge.
    6. Better gauges have been made by comparible sales, factors/adjustments for the condition of the house, location, lots size, etc. Those may be found in a good appraisal.
    7. When the market is “bad” the house price goes down a little but the condition goes way up. A dump is a good market would sale quickly. The best condition house sale moderate quick in a bad market.
    8. Unemployment at 9% or more. U-6 at near 20% and we are in a recovery? RE is at the bottom? I have some RE to sale to you…. buy before you’re price out of the market…. latter may be true in the short-term or if your cash is “taxed” away by inflation. But BO would never do that to hard working Americans. or is he.

  5. Lori

    If you are a house bear be very careful if you haven’t own at least one.

    Irvine housing is running very low inventory now, this is contributed by ultra low interest and mortgage rates, and $8000 incentive. If Obama extends this and even raise to $15000, then the housing price in Irvine will probably backup again.

    I received a couple of call from bank, just recently, and will loan me $. This hasn’t happened in last two years. I thinks Obama is creating another bubble, In next two years, US dollar will goes down around 15% and inflation will up 15%, but of course CPI will be low, so does rates. Given this combination, I think IR previous chart, to predict the house prices in next couple of years, need to be modified to be justified with these factors.

    For example, 15% inflation + 15% dollar down + $150000 incentive + 1.5% CD rates + 4.5% mortgage rates. If housing prices stay the same, this means that the house actually goes down 30%.

    Be a winner…

        1. tonye

          The significant part is that the banks are again drumming up mortgage business and money is cheap again.

          However, those of us with money in bonds should start looking at buying gold and silver?

    1. Gemina13

      BWAH HAH HAH HAH HAH HAH!!

      ::wipes eyes::

      No, seriously, say that again. Louder.

      ::dies laughing::

      Two phone calls, and you think the Great House Giveaway is back on. Go ahead, take them up on it. Come back in April 2010, when you’re not only underwater but behind on payments.

    2. mike in irvine

      🙂 … 15% inflation & 15% drop in dollar and you are worried about housing (or think that housing will rise)… repeat this 10 times and then revisit your post.
      We can discuss the joke about 1.5% CD rates @15% inflation at a later date.

      1. Mark

        It’s not even internally consistent logic. Shouldn’t the 150000 be 15000, and the CDs/mortgage be subtracted instead of added?

        Either that, or Obama’s going to pass a $150000 incentive…

    3. tonye

      yep… I got two letters offering us mortgage loans too.

      This on top of several credit cards offering us 0% cards.

      Of course, the buffoons at Macy’s sent us a letter saying our card there is going up to 27%. LOL… I haven’t used it for eons. I guess they must really want my business, huh?

      OTOH, the Amex at Costco is going strong. I opened the account about a year ago, with a 3000 dollar limit (huh?)… they have kept raising it, and just popped again to 14K.

      I guess they hope we’ll stop paying it off every month?

      Anyhow, money is getting cheap again, except that some companys (Macy’s) must be hurting.

      1. Lori

        Yes, money is getting cheap again, very cheap. The bank can take huge profit from this
        Dollar already down 10% last half year, if it goes down another 10% and along with housing prices already down at least 20%, that is actually a 40% discount. This equals a full bailout of the entire US hosing bubble, or eight trillion dollars.

        What do we get? Wall St has big pay cut this year compares last year: the amount is $800/yr.

        BTW, I was looking either investment properties or upscale house last two years, that’s why I got call from some banks contacted.

        1. tonye

          I don’t think the dollar per se has been devalued so much. Otherwise money invested in Euros would be worth that much more.

          So far it seems like ALL fiat currencies are being devalued at the same time.

          That’s why gold is at record highs.

        2. E

          “BTW, I was looking either investment properties or upscale house last two years, that’s why I got call from some banks contacted. “

          If the bank is contacting you, you’re the “mark”. 😉

          If you were looking at investment properties two years ago, you’re a fool.:-P

          Thanks for catching some knives however. Our economy depends on foreigners such as yourself! :vampire:

  6. Walter

    “instead I find $340,000 worth of HELOC abuse”
    “I guess this won’t be a short sale as this is about a 50% DTI.”

    If you pull out money and only have 50% DTI, is it HELOC abuse? As long as the loan gets paid off, I am not sure I would call that abuse. Were they smart to get a 1 year arm? That is debatable. But I would stop short of calling it abuse.

    Taking out loans that you can not payoff and can put your family or personal finances in jeopardy–that is abuse.

    1. WaitingToBuyByAndBy

      I think you’re missing the point that as long-time owners, the property should have been paid off (if the owner were financially responsible).

      Clearly, rather than paying off the home, the owners have re-financed all along the way.

      Put another way, the debt is 819% of the original purchase price.

      1. Walter

        For the record, I am close to paying off a mortgage on a rental I own; I am not saying that running up debt is a good practice.

        That said, to say that someone that borrows money against a piece of real estate is not financially responsible is a bit judgmental. Not all people that borrow money waste it on $2,000 bottles of wine. Some, if not most, use the money for kids college, to start a business, to invest, etc.

        That was my point. As long as these owners have not put themselves in jeopardy and pay back the money, I would not call this abuse. With a 50% LTV, I am not so sure this is a good candidate of abuse.

        819% is a shocking number, but adjusted for inflation, it is not so impressive. Not sure what the inflation adjusted number is, but I am sure it is not such a shocking number.

        I get the point of what IR is saying. I just think that he should not use a home with 50% LTV as abuse. What if that money was put to very good use and paid back with little effort? That was what I was trying to say.

    2. 50% LTV

      Did IR mean 50% LTV? DTI can only be calculated if someone’s income is know which I doubt that’s the case here… FWIW.

        1. tonye

          If you think about it, perhaps owning a house clear is not such a good idea if

          (a) You are working
          (b) You have the ability to invest the money elsewhere and make more money than the cost of the loan
          (c) You think the value of the house is going to drop
          (d) You have the discipline to invest the money, not spend it.

          Owning a house clear is a good idea when you retire and/or when you want to live with a low cashflow headache.

          1. newbie2008

            There are also:
            1. if you think inflation will be going significantly up and you will be paying back with inflated dollars.
            2. take a Sch A house loan instead of a non-Sch A loan (e.g., car)
            3. Need cash for other investment, business or education — not for needless spending.

            Why (c)? How is a loan going to help if house price is going to drop? Do you mean a walk away with cash in pocket? Assumes that the bank won’t go after you?

          2. Walter

            “Why (c)?”

            Basically when you borrow on purchased RE, you are getting a free put option. Sure your credit gets whacked, but you have the option of if you want to exercise the option. If you pay cash, you lose, end of story.

  7. AVRenter

    Ah yes, 14951 Sumac Ave, a beautiful place. Just half a click down from cross streets Poison Ivy Blvd and Poison Oak Pkwy.

  8. IrvineRenter

    Housing risks still lurk even as buyers return

    RIVERSIDE, California (Reuters) – On the surface, a glimmer of confidence is returning to the battered U.S. housing market, after more than three years of gut-wrenching defaults, price slumps and foreclosures.

    But investors and homeowners in California, the most populous U.S. state and a benchmark for housing across the country, are bracing for another fall as emergency government support measures fall short or expire.

    “All that has been achieved is to put off the real pain until later on,” said Mark Jacques, a mortgage broker in Corona Del Mar, California. “I’m hunkering down for the storm.”

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