I think it’s a good time to revisit the median price discussion that I first brought up last August.
The median price is a decent indicator of the general direction of home prices, but it definitely has shortcomings. The biggest problem is that the median is largely influenced by the mix of sales between high and low-value houses. In a relatively stable housing market, when the mix stays somewhat constant, the median gives a fairly accurate picture of what’s going on with prices. However, when sales of houses on one end of the price spectrum begin to drop or increase at a rate considerably faster than other price tiers, the median gets all screwed up.
In order to investigate this phenomenon, we can break King County into three regions. For a more in-depth explanation of this breakdown, refer to the original median price post.
- low end: South King
- mid range: Seattle / North King / Vashon
- high end: Eastside
When we last checked in on this data, sales on the expensive Eastside had surged up, leading to a misleadingly high county-wide median price. Of course, that was July’s data, which was just before the tightening in the jumbo loan market. As you would expect, starting in September, sales in the predominantly jumbo Eastside market dropped back down to normal and below-normal levels.
Here’s the chart showing the percentage of county-wide monthly sales that each of the three regions has accounted for since January 2006:
dashed line: 6 month rolling average | Click to enlarge
As a percentage of total county-wide sales, sales on the Eastside have dropped back down slightly, while sales in South King County have made a slight recovery from their lows of last summer. Meanwhile, Seattle continues to grab a larger and larger percentage of sales, as the slowdown hits the outlying areas first (this can be observed in the neighborhood breakdown posts as well).
You can also see that in recent months, there are a lot more dramatic spikes in the graph, as the mix of sales fluctuates somewhat rapidly. Here’s a graph showing how far each region is deviating each month from its average share over the last six months:
I added the total YOY sales as a bar graph referenced to the right axis to demonstrate how much the declining sales volumes overall seems to be influencing the severe swings in the sales mix. As the decline in sales becomes more severe, the mix is more volatile, which leads to a less meaningful median price.
Here’s one more visual example of the problem with the median. The pie charts below show the breakdown in sales in February 2007 and February 2008.
In February 2007 the median price was $429,925, and was calculated from a pool of roughly 28% Eastside, 33% Seattle / N. King, and 39% S. King. In February 2008, the median price was virtually unchanged at $429,900, but the pool was noticeably changed to 27% Eastside, 38% Seattle / N. King, and 35% S. King. The Eastside made up nearly the same amount of the mix, but sales in low-priced South King County dropped faster than in Seattle, leading to an increase of five percentage points in Seattle’s share of the mix.
I point all this out just to remind readers that the median price is deceiving. Most likely, the price of homes in most parts of King County was not flat from February 2007 to February 2008 as the median price suggests, but was actually dropping. However, with Seattle making up a larger percentage of the total homes sold, that fact is being masked.
Unfortunately, looking at median prices for individual NWMLS areas (like we do for months of supply and inventory) wouldn’t be very instructive, since most areas have such a small number of sales and the median tends to fluctuate pretty wildly. The only real way to get around this problem is to look at resales of the same houses, and compare the price to the previously sold price. This is of course exactly what the Case-Shiller Home Price Index does, and again, I believe that February’s Case-Shiller data will indeed show a larger YOY decrease than the median. I’m predicting it will show around -2% YOY.
The bottom line here is that median prices are moderately useful as a broad gauge of market direction, but you shouldn’t put too much stock in the specific numbers.
GOOD JOB TIM
You showed us trend charts, then gave us a good dose of reality.
The statistics can mask the truth.
The CPI statistics they use to calculate our tiny wage increase COLAs at like 2-3% the last several years are another complete joke.
Thank God for places like Seattle Bubble, its a breath of fresh air!
I like pretty charts, my mind cannot comprehend words.
pretty images > boring text.
one suggestion though, create a simpler version of these charts with less variables so that david losh can understand it as well.
The Tim,
All in all, nice job in your evalution of median prices.
In the last 7 weeks, 1 out over 50 homes over 1.5 mil sold in Area 500. 1 out of 38 in 550 Redmond. The low end is absorbing, the high end is not. This affects both median and mean.
I am convinced that sales ratios (AR’s) give the best data on the strength or weakness of a market.
Greg –
Question for you. I tend to agree that absorption ratios are a good measure of market activity. I follow the “Market Action Index” over at Altos – which seems to be exactly that (% of listings selling in a month).
I was comparing your post the other day of markets with rising vs. falling weeks of inventory – and all these areas show up as sellers markets on Altos – with MAI LT 25 (most in the range of 15-17)
Do you look at these? thoughts?
http://www.altosresearch.com/research/WA/MERCER+ISLAND
deejoyoh,
I use charts that break down each price point within every NWMLS area on a weekly basis. Because I’m working with buyers and sellers in specific price, I can see what’s happening where my clients are.
To see what the charts look like:
http://blog.seattlepi.nwsource.com/realestate/archives/133957.asp
I also have a paid subscription with Trend Graphix that can give me general market info / break down to a zip code/ see accurate price/sq foot info/ original list price, list price, sell price/ market time breakdowns, etc.
It’s been awhile since I studied Altos’ format. I’m sure it’s a cut above what most people see. I hate to say this, but you’re seeing better information than the vast majority of part time real estate agents see. There are a lot of agents that don’t really know what AR’s are and how to use them.
Thanks Greg – and for the reference to the post. Good stuff. I’m kind of a data-driven guy myself ;-). From what I have seen, much of the real estate business is about people and sales skills. Those don’t always go hand in hand with a bent toward quantitative analysis!
One problem for those of us w/o access to the NWMLS is that we can’t get a granular look at the demand side of the equation. IMO, that’s a reason why there is much discussion of inventory on this site. Its easy to pull data on what’s listed from any one of a number of public sites. Few here have the ability to look at what sold (or for how much).
Is Seattle grabbing a larger and larger percentage of sales because the slowdown is hitting outlying areas first, or because more and more units are being created in Seattle as the city gets denser?
deejayoh,
Yes, the real estate business, like all business is very much about people skills. I’ve often said that 2 attributes that most successful businessmen/women develop are good people skills and good project management skills.
Approx. 80% of the real estate agents are part timers and hobbiest. 20% make up the full time professional. The agents who make real estate their living are the agents who are most likely to take education seriously and learn how to analyze and understand the market. An agent can have people skills and be able to analyze :)
I understand your frustration about not having easy access to demand numbers.
We both have an interest in accuracy. That’s why I come around now and then. I am more interested in contributing to the conversation than fighting. (I use my cairn terrier Kona for my avatar to keep the self-promotion down over here down)
Ira,
We generally see Seattle’s demand numbers pick up before the rest of the region. The slowest segment of the market, as I see it is rural high end.
Greg,
I am trying to wrap my head around this but am struggling. If the high end of the market is having difficulty absorbing, then why are South King County sales a lower portion of the total sales in Feb 08 than they were in Feb 07?
wasn’t trying to stereotype.. That’s pretty much exactly my point: bunch of part-timers, and some of the full timers who are analytical. I have seen enough meyers-briggs results to know that most NT-types are not in sales! it’s the rare mix.
Matthew,
Here’s my take on your question. I’m curious to see The Tim’s thoughts on this, as well.
While the high end is still quite slow on the Eastside, lower prices are absorbing. The Eastside’s percentage of closed sales in Feb., as I see it on the The Tim’s charts, is consistent with the previous year.
The rate of sale is obviously higher in Seattle and the Eastside than the south end, which caused the south end to slip significantly by percentage. To me this stands to reason as outlying areas lose significant volume before core areas.
Your thoughts?
Greg Perry said “We generally see Seattle’s demand numbers pick up before the rest of the region.”
Yes, maybe, but is that what we’re seeing? The way I read that is that we’ve seen the worst, and the recovery is starting with Seattle.
Maybe Greg didn’t mean it that way and I’m reading it wrong, but it occurs to me that we haven’t seen the worst yet, and that it’s just a matter of time before Seattle joins the “gloom ” party…and yet, it’s hard for me to fathom that the demand for a 1920’s craftsman in Wallingford in decent shape is going to lessen much. I hope I’m wrong, because I’d rather not see the continuation of this ‘first world’ mentality of Wallingford/Phinney, etc. and everything else second and third world.
Tim,
This is exactly why I don’t put much stock in county-wide home price stats.
The only truly meaningful stats are for comparable home sales within a given neighborhood, because we all know that the the key to real estate is “location, location, location” and the rate of home appreciation and depreciation varies widely from neighborhood to neighborhood because of the effect of location.
The reason Seattle homes have not fallen as fast is because they are located near the downtown Seattle job centers.
Homes located far away from the major job centers of Seattle and Bellevue are being hit much harder than the close-in neighborhoods.
For example, homes in the Puyallup area are taking a beating right now, while home prices close to downtown Seattle and Bellevue have not fallen as much — yet.
Another reason why the outlying areas are harder hit is because they have a much higher percentage of subprime mortgage borrowers. People with poor credit typically have lower incomes and theferore they bought houses in outlying areas where the home prices are cheaper.
So the outlying neighborhoods have a double-whammy of a less desirable location (based on commute times to the major job centers) and a higher percentage of homes for sale and foreclosures due to the subprime borrowers trying to bail out of loans they can’t afford.
The bottom line is that the median home price stats constantly referenced in the media are pratically meaningless except for capturuing very broad trends in the home sales market.
That’s why I have consistently stated that home prices will drop by an “average” of about 10-20% by the end of this year — because there are so many variables from neighborhood to neighborhood that stating an overall number for King County is highly inaccurate.
Steve,
Well written!
Prices rise and fall with supply and demand.
In any given NWMLS area, different price ranges — and neighborhoods — have their own supply and demand dynamics.
It is quite possible, better said probable that we will see prices appreciate in some of the core NWNLS area price ranges / neighborhoods, yet in the same area, other price ranges will erode.
Generally speaking, as I see it, the biggest price erosion in the core areas will be in the high end — not the low end. In the core areas we may see continued pressure on low end affordability.
I have also observed that median prices somewhat lag current supply and demand numbers both going up and going down.
I am also seeing house style dynamics. On the Eastside, split entry houses appreciated at an unreal rate, because supply was so tight. Now that there is more selection, split entries are lagging the market.
This is a fun market for a professional to work in!