Monday, July 31, 2006

Skewed Distributions

As I've been rather busy of late and frankly there is not much else that needs to be said vis-à-vis the housing bubble my rate of postings has slowed and will probably on average remain slow.

But I did find this posting (the July 29, 2006 entry) over at the Charles Hugh Smith Blog worth highlighting as it does a pretty good job of explaining something that I've previously referred to but never went into any detail to explain because I thought it was fairly self-evident from the Marin data that I've already posted (e.g., this); anyone with a basic understanding of statistics and the bell-curve probably already realized this. It explains how the median sales price of a housing market as a whole can go up while the sales price of individual houses comes down. At this point in time (the transition from an insane seller's market to a buyer's market [only the future will tell how insane the buyer's market gets]) the median sales price is more a measure of the mixture of houses that sell than a measure of individual value.
Whenever I have a (real estate) question I cannot get answered, I turn to Bob [Casagrand, realtor].

So I asked him, Why is the median rising, when each individual home is selling for less? Actually, most San Diego homes are back at 2004 prices.

Bob told me that the under $400K buyer is squeezed out due to rising prices and higher interest rates. The high end is holding up a little better, because the ripple effect has not yet made it to the high end, and the low end has weakened MORE than the high end.

Last year, the +$1million home was 8.5% of sales. This year it is 10%. This is skewing UP the distribution of homes sold, raising the median, although each home, including the high end homes, are selling for 10-15% less today than last year.

We are selling proportionally MORE of the expensive homes, and the median tells us only about the MIX of homes sold.

It does not tell us about the value of each home. The $1.1 mil house was worth $1.5 mil in 2004, so it has also gone down in value.

If you want to know how each house has held up, you have to use the Case-Shiller index, or the OFHEO housing price index. Both track the SAME house over time, giving us the change in valuation of each house instead of the change in the MIX of homes sold.
This effect can easily be seen in the recent Marin data where we get such absurd (as in 'ridiculously incongruous') appreciation rates for houses in Tiburon/Belvedere (+42%), Mill Valley (+26%), or Bolinas (+229%) even while prices are reversing. It takes 6-8 months for a change in interest rates to begin affecting the market and those effects first show up in the lower priced houses.


cajun100 said...

Yes, real estate agents and lenders really enjoy stats like the "median value" and "percentage increases in value" that are typically published unquestioned by media reps. Who typically understand none of it.

This is similar to the increases in population often misused in the media to imply effective urban growth (i.e., Area 1 grows from 890 to 1100 residents -- 24% growth!!! and Area 2 from 2,000,000 to 2,350,000 -- only 18%!!!). Law enforcement agencies also use "crime statistics" in similar interesting ways.

What is important about your posting here is for people to really understand what it means to have median value pushed up as a market (and prices) soften. It emphasizes the lack of buying power that has become a factor -- only those with much larger discretionary income, savings, windfall $$$, etc. will be buying -- at their high price point. In other words, the mass market is very, very much on the sidelines.

During the Great Depression the rich enjoyed building or buying bigger and bigger mansions, while the general public lost virtually all of its housing buying power. Wonder what the "median" value of homes sold or constructed in major metro areas looked like in 1936?

Lisa said...

The MSM has done nothing to educate the public about what median means. If the median goes up 10%, folks think their individual home went up 10%.

But year over year is starting to flatten, so as people wake up to the fact that they won't be earning $100K a year just living in their house, the bud will be off the rose in a big way.

rejunkie said...


I thought this was pretty obvious too. That is why tends to point out changes in market mix when presenting their median data. Also, any realtor worth their salt will point out the differences in different market segments (why the low end was "hot" from 2003-2005 and why the high end is "hot" today). In the past few years, people trading up have been exploiting the bottom end (< $700k) moving up faster than the mid-upper band ($900k-$1.2m) which had effectively shrunk the gap between entry level homes (read: condos) and single family homes in Marin.

If you look at Vision RE (nee annual statistics, they break things down by city and SFH/condo. This explains why the condo I bought in January 1998 for $198k sold late last year for $535k (170% increase), while the SFH Marin median only went up 123% in that same period. (from $430k to $960k).

For tract homes and condos, it is the same neighborhood/development sales ("comps") that are more telling. The aforementioned condo has probably dropped $15-20k since I sold it, based on recent sales in the same development, and the San Anselmo house I bought with the proceeds (for near the county SFH median) has probably inched slightly higher, based on comps. (In case you start thinking I am some RE genius that is tooting his own horn, I am taking a bath on another condo I bought in 2004 -- you win some, you lose some. Oh, and if you are interested in buying it and cutting out the RE agent, let me know -- I have great tenants).

Anonymous said...

Another good post! People want to reduce things to a single number. It is to the mind what a saltine is to the stomach, easily digested but of little nutritional value.
This is why large sudden changes in sales volume are so important. They are the clue that one needs to look at the concurrent change in distribution of sales volume vs. sale prices.

Marinite said...

rejunkie -

Thanks for that great contribution.

In case you start thinking I am some RE genius that is tooting his own horn...

I admit that there was a time when I sort of thought that, but not anymore.

Marinite said...

Also keep in mind that the median sale price does not reflect any incentives given to buyers.

Anonymous said...

this decline in prices for the less than $1m has just begun to effect the refi market.people who bought in 2004 on with 20% or less down have very little or no equity in their homes,and many are underwater.even if they kept their credit in good shape,getting out of that teaser rate loan or option ARM is not possible for many.

Anonymous said...

..just want to thank you for this confirmed my suspicions about the "median price stat" and how the media uses it incorrectly..

Marinite said...

Ha ha. The final set of June '06 numbers came out from DataQuick. Bolinas' appreciation rate was up +229%. LOL! Only two houses sold. One was a whopper. Go Bolinas!

This is an excellent lesson in statistics. Just imagine how badly the overall Marin appreciation rate would be negative for June if obviously incongruous and statistically invalid measures (like Bolinas) were not included. Oh, but that would not be in realtors' best interest and there's no way we could ever count on the Marin IJ to report honestly on it.

rejunkie said...


This house was listed last summer for $799k, dropped to $769k, and sold at "100%" of its listing price on 7/29/05. It is back on the market at $815k and the only thing I see that has changed is the interior paint color. I contemplated (briefly) making an offer on this when it was on the market last year so I am pretty familiar with it.

This is a better indicator of Y-O-Y market conditions than the published median, since it is a SFH in a good school district that would be considered a typical family home (albeit a double six-figure income family). I will watch this for DOM, listing price adjustments and selling price as I think this house is a good barometer of the current middle of the market.

Marinite said...

This house was listed last summer for $799k, dropped to $769k, and sold at "100%" of its listing price on 7/29/05. It is back on the market at $815k and the only thing I see that has changed is the interior paint color.

Anyone who ever claimed that flipping does not happen in Marin was deluding themselves.

It's just a matter of time for Marin. Time to pull out the reclining chair, don sunglasses, pop some popcorn and watch the show as it unfolds.