You are sitting in front of the best cardiologist in town. All tests are done and this is the moment of truth when she lowers her bifocals looks you straight in the eye and says: “Get rid of the potato chips, chocolate covered pretzels, and all other junk food you wrote on the list you prepared for me. One drink a day is your limit or I’ll see you next in the intensive care unit of the Hospital for The Misinformed”
The Dietician is next, and in your new balanced diet, healthy fruits and veggies start to play a role in your life. You have glanced over the eleven pages of healthy eating and undertake to eat at least 5 vegetables and 4 fruits a day.
And henceforth you eat four cherry tomatoes and five blueberries…
So it goes with home prices, information is applied incorrectly. No one is saying that there is not a lot of movement in home prices in most marketplaces. But much of what we read is simply not based on fact. It is an attempt to jump on the crowded bandwagon of poorly qualified home price soothsayers, some eating cherry tomatoes and blueberries, while others are on a fixed diet of small watermelons whole coconuts and giant pumpkins, when available.
The moral here is: quality and quantity make up a healthy diet of true information. Statistics should not be the fact. Find the fact that is the statistic. Numbers prove the facts. But it is the facts that produce the numbers.
Let’s look at a typical marketplace. With the right information you can make the same case in any jurisdiction.
Note that the average price went up by $50,157 to $484,018 in just one month! Couple of my investor clients (if they saw this) would want to cash in before they “miss the boat on what appears to be the start of a boom market”, and I would say hold on a minute, let’s look some more.
A bit more digging and up comes the median price. What gives? The price only went up by $15,000 for the one month and all of a sudden homes are selling for $370,000 instead of $484,018.
This is not the place to explain the difference between Average (also called “mean”) and Median price. Google “The difference between average and median price” and find the explanation that suits your comfort zone. The difference is crucial and basic. In a downtrend it can be the difference between some mild panic and the sinking of the Titanic. In a rising market it like a child stepping up to the drinking fountain and you climbing a high Mountain.
If they ever find a place for me in that crowded bandwagon of poorly qualified home price soothsayers I’d love to teach them this difference. I’d tell them that if you don’t know your cherry tomatoes from your coconuts, you have no business writing about the real estate business.
Now that we have the stats let’s look at what is making the stats. First Fist we examine the market and separate the fruits from the vegetables. I used REality® to fine-tune my comparison point and came up with $410,000 as a good mid-way point. Then I used REality to produce the figures and print How many homes sold for less than $410.000 and how many homes sold for more: all of which took less than minute.
Here are the two graphs both of which follow the almost the same Market-Trends, DOWN! Perhaps no surprises here.
Now let us determine what percent of the total each of these two classifications has. Remember the 5 vegetables and 4 fruits a day? Don’t we want to know how big the fruit is? The same logic applies to when you judge the average price of homes.
In the bottom graph November and December show a rise in the percent of total of homes over $410,001.
I hope you see why taking an average of a market hardly paints a more complete picture. An even more complete picture can be had, by breaking your marketplace into three types of home segments: Startup, move-up and Luxury. Define startup as the first 60% of all homes sold, move-up as the next 25% and finally the luxury as the last 15%. Now you have your basic lettuce as startup, tomatoes are move-up, and artichokes as luxury. Grouping them all together to pronounce a market average, reminds me of a fellow statistician with his head in the oven and his feet in the freezer, who when asked how he feels replied that “on average I feel fine”.
I hope the next time some misguided columnist pontificates that the average price is up or down, ask him, to please segment that by types of homes, location city, and other variables. Because now you know that the statistic is not the fact. Find the fact, that is the statistic.
Last night, my dream finally came true. My friend Tiel Oilenshpiegel got me a front row seat in that crowded bandwagon of poorly qualified home price soothsayers. The consensus of opinion was that paychecks were hard to come by, and that nobody wants to read good news when they think times are bad, or bad news when they think times are good. I made a great impression, and they offered me big time money if I could come up with a real headline grabber. I logged in to www.realestatestatistics.com and came up with this chart:
“Three storey homes set to nosedive at an annual rate of 171.84%”
I just got a call from Tiel. They loved it and want to make me president of the bandwagon. This was the first time that the group got into three-digit gloom and doom and “could prove it”.
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For more information or to inquire about using the articles and data presented, contact leon@REstats.com.