Median Price Methodology Examined

Median Price Methodology:

The methodology of reporting median home prices varies depending on the source. The MLS uses the aggregate method of calculating the median based on the preceding twelve month sales. We discuss why in a changing market this system is flawed at best.

Standard & Poor’s methodology is perhaps the most accurate, but it relies heavily on past sales and is therefore better suited for looking at historical trends than illuminating current market conditions. Bel_median_12

We employ another approach which is to examine the most recent month’s sales, and adjust for larger or smaller homes selling to help mitigate wild fluctuations in median price results.

For example, the MLS reported Belmont’s median value for 2007 to be $945,000; yet looking at the median price reported at the end of December it stood at $1,035,000; a significant difference and an overall upward trend from the previous three years.

Lies,Damned Lies, and then there are Statistics…

The article titled "California’s October home sales slide 40%" reported by Inman News today evokes thoughts of Mark Twain’s famous saying there are "Lies, damned lies, and statistics".

Though the number of homes which sold is easily tracked, calculating the true median home price is a little more elusive. The size of homes which sell in a particular period can greatly influence this statistic. The median price has been used quite often as a benchmark for home values since all things being equal, roughly the same size homes sell each month. However, current lending conditions affecting first-time home buyers have skewed these numbers and in fact a disproportionate number of larger homes are selling; and since larger homes sell for more, this has created the appearance of an increase in the median sale price in certain areas.

For example, one of the cities sited in the article as one of the 10 cities and communities with the greatest median-home-price increases in October 2007 compared to October 2006 was Redwood City at 20.6 percent. But if one examines just the single family homes which sold in those two periods, it reveals that in October 2006 the median home price was $810,000 and a year later $1,100,500-a whopping $290,000 more! Pretty exciting news for sellers until you look further at the data and realize that the median size home sold in these two periods also grew; from 1330 sq. ft. to 1760 sq. ft. Calculating the price per square foot which homes sold for in October 2007 ($600.00) and applying that to the difference in the size of homes sold (400 Sq. Ft.) for these periods reveals that $240,000 of the $290,000 increase was simply due to larger homes selling-still an increase, but hardly worthy of making the news. And of course if this scenario is played out across California as a whole, one wonders if the 9.9% median home price dip isn’t actually much steeper than reported?

*Data retrieved from the REIL MLS system for San Mateo County.