Friday, February 17, 2017

Median Home Price a Complex Metric

Median home price is a metric widely used in real estate as a bit of a benchmark for relative values in a particular area. Although many readers may already understand this unit of measure, for the benefit of those less familiar, I can provide a simple definition. Median is as basic as "middle". It defines the value at which half are higher and half are lower. This differs from average which takes the sum of all values and divides by the number of values. Average can be skewed more easily than median, especially in a localized setting where there are fewer than 1000 sales.

To show it in an ultra simplistic way take a look at the series below:
  1. 189,000
  2. 198,000
  3. 201,000
  4. 215,600
  5. 225,000
  6. 226,000
  7. 228,000
  8. 231,000
  9. 297,000
  10. 456,000
  11. 908,000
The average of these eleven home sales is $337,460 but the median is $226,000. Half the homes on the list are lower than the median and half are more. Most real estate markets will have way more than eleven sales, but the grouping is usually similar with a whole bunch of sales in one general price range and a handful of extremes often in the high end. In an average these high end sales can skew the average north of reality because the bulk of homes sold are near the bottom of the price range and there is theoretically no maximum limit to the price of a house. The median is a better measure of what is typical in a market as the extremes do not carry more weight than their proportion to the overall list. That is to say a $5,000,000 home will only move the median one sale up on the list but it could move an average way off the mark. For example if I add a $5,000,000 dollar sale to the list the average jumps to $726,005 but the median only moves up to $227,000 precisely in the middle of the list of sales. 

But median price can also be skewed by local demographics and local zoning, neighborhoods and other fixed issues. Generally real estate becomes more valuable in close to the city center and or center of jobs. People will pay more to avoid a long commute. But there are also limitations based on the existing conditions. For example, Vancouver, Washington has a lower median home price than the whole of Clark County. In theory it should be higher as Vancouver is by far the largest city in Clark County and the overwhelming center of jobs for Clark County and it is immediately adjacent to the core city for the metro area, Portland, OR. Yet its median is lower. Why is this?

Simple, Vancouver has a great mass of neighborhoods that are very old and contain thousands of older and smaller homes. These homes are very popular as they are affordable to first time home buyers. As one radiates away from Vancouver the homes are either new and larger or on acreage in the rural areas. These homes are often very expensive. But if one were to compare a 3000 square foot home on a 1/2 acre in Vancouver to the identical house in Ridgefield, the Vancouver house would be more expensive if all else is equal. Yet Ridgefield has a higher median home price than Vancouver. Ridgefield does not have a very large quantity of older and smaller homes. It also has a disproportionately high number of large country estate properties. 

Someone looking in at Clark County, Washington from the outside, might think Vancouver was a local value proposition based on its overall lower  median home price. But if that hypothetical outsider were looking for a large 3000 square foot home on a 12,000 foot lot in upper middle class neighborhood, they may find that Ridgefield or La Center have lower prices on those homes than Vancouver, despite the fact they have a higher local median. They will also find that there is a substantially longer drive into downtown Vancouver or Portland, OR. 

There are often trade offs when deciding to live "in close" versus a bit further out. Most often these neighborhoods in close to the city are more heavily populated with more traffic and other city type issues. They also have the upside to the city in the form of amenities like shopping, restaurants, etc. A simple median price comparison is rarely enough to determine whether a neighborhood is suitable for any one buyer. A local real estate professional can offer sound advice regarding the best home for each individual buyer's needs.

Median values can also change due entirely to trends in the market. For example the real estate market could be flat with only a slight year over year appreciation say 2% in actual values yet one local neighborhood could have a median moving way up to the tune of 10%. This could be trend in sales of larger homes. It could also signal a change in local neighborhood dynamics. Maybe a new city park was completed and many people want to live near it. 

Just because a communities local median home price has risen, it does not always translate directly to a specific house. If the local median has risen 8% in the last 12 months an individual home in that market may have only increased in value by 4% or perhaps it rose 12%. The market is a dynamic phenomenon with many variables.

There is a plethora of information flooding our senses from the Internet, but it can be very difficult to see all that data come together cohesively without a local real estate pro shedding context and perspective specifically tailored to an individual buyer or seller's concerns and needs. This is why a local Realtor® is such a valuable asset for anyone participating in the real estate market.

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