Let’s unpack what goes into statistics in the real estate articles. First statistic commonly cited is average sales price. The average sales price is the average of all the homes sold that had listed on the market. The increase or decrease of the average is computed by comparing that same time period to the same time period during the previous year. The second statistic is the total number of homes sold in a given month compared to the same month in the previous year. These two statistics are commonly used to assess the health of the market. There are two major flaws in the consideration of statistical evidence used to assess the real estate market.  

The first major flaw is assuming that an increase or decrease in average sales price is an indicator of market health. When the average price is computed of all sales there is no account given to the number of less expensive homes sold as well as no account for the number of more expensive homes sold. The more homes sold that are less expensive the more skewed the numbers will be towards a lower average price. The opposite is true as well. The assumption that a lower average price is indicative of decreasing home values is simply erroneous because it is an average of all sales. Below is a table that compares the statistics of November and December of 2007 and May of 2008. Percentage change is compared to the same period during the previous year.

 Looking at these statistics, one might assess that November was a much better month than December and that May wasn’t a good month at all. If you look at the price of homes in December it had fallen, then you must assume prices are falling everywhere. Meanwhile, the average price of homes increased in May from December but was still down 3.8% from the previous year. It might surprise you to find out that more homes were sold in December than November and that May had more sales than either of the others.  

There is an important piece of information that goes into the average price that is neglected. We must dig deeper than simple averages to get a feel for the pulse of a real estate market. The important piece of info is the number of homes in the various price ranges that make up the average price. There is any combination of price ranges that can be analyzed to give us insight into how the market is doing. There are 8 price ranges that have been set up by the MLS reporters to provide insight about the market activity. Below is a table showing the breakdown of price ranges for three months as well as the percentage of the total sales for that period for time. 

 So what does that tell us? First, we learn that a pretty basic statistical principal. The greater the percentage of the sales of lower priced homes and the lower the percentage of higher priced homes the lower the average price will be. So next time you hear a statistic about the average price falling, pause and consider the possibility that it could simply be that more inexpensive homes sold that given time period. Second we learn it is dangerous to rush into assuming that values are going up or down because of the average sales price. The average is simply an average of the homes that buyers decided to purchase in that period of time. 

The second major flaw used in reporting of the market conditions is comparing market conditions to the same time period during the previous year. No matter how hard one might try to pretend that market conditions of May of ’08 are identical to May of ’07, any comparison of the results of a year ago to today are simply unfair and inaccurate. A more accurate comparison would be the previous month of the year rather than the same month in the previous year. Comparing to the previous month provides the most accurate assessment of how the market is adjusting and responding to the available financing and constantly shifting outlook for the economy. The conditions of the marketplace today and buyers’ ability to finance have little in common to a year ago. Since there is no scale or factor that can be applied to today’s statistics to normalize for a year ago, the most accurate assessment of the current market conditions should be a comparison to the most recent period of time most comparable to the current conditions.   

Next time you see statistics being thrown out by the media, stop and consider that there might be more to those numbers than meets the eye.