Hi Bob, love your site. Your observation is right on — median sales prices do not necessarily reflect the health of the market. For example, if the market ground to a complete stop, except for $10,000,000 homes, then the median sales price would go up to $10,000,000.
On the other hand, the average (mean) sales price is not a better indicator; in fact, it’s worse (under your assumption that the high-end houses are their own market). Here are two scenarios, each with five home sales:
10,000,000
500,000
500,000
500,000
500,000
MEDIAN=500,000 MEAN=2,400,000
Here are a couple of factors that you don’t hear discussed in regard to the supposed continued appreciation in the high end markets:
1) This category of homes has a much greater percentage of “tear-down” remodels and extensive remodels in general. Hence, the median home being sold each year is a moving target. Appreciation should be a measure of the increased value of the same item — not a “new and improved” one.
2) The percentage of homes in this category that are second/vacation homes is higher than in less expensive markets. I suspect that many of the most expensive homes in this category fall into this category (versus the typical 3BR/2BA ranch style.) One would expect that second/vacation homes are more liquid than primary residences. The supposed continued appreciation at the higher end could in fact be an increased turn-over of these second/vacation homes even if they are selling at a *reduced* price. I.e.:
Year 1: sales
1,100,000
1,300,000
1,500,000
1,700,000
Hey! I was searching for a totally different kind of thing and i spent such time to visit all around. I post only now, but this so good article on this page is so impressive, that I just have thing to say to you thanks for this very instersting point of view and thanks again for all the great works you did for this article here.See you
Right on insights!
Comment by Los Angeles attorney — July 28, 2006 @ 7:20 pm
Your points are well taken. With a number og homes ‘sitting’ on the Mkt. for months now, your article really is on the mark!
Comment by Dr. Larry — July 28, 2006 @ 7:27 pm
Just heard that the California Association of Realtors is now no longer saying California real estate market will have a ‘soft landing’.
Larry
Comment by Dr. Larry — August 1, 2006 @ 6:20 pm
Hi Bob, love your site. Your observation is right on — median sales prices do not necessarily reflect the health of the market. For example, if the market ground to a complete stop, except for $10,000,000 homes, then the median sales price would go up to $10,000,000.
On the other hand, the average (mean) sales price is not a better indicator; in fact, it’s worse (under your assumption that the high-end houses are their own market). Here are two scenarios, each with five home sales:
10,000,000
500,000
500,000
500,000
500,000
MEDIAN=500,000 MEAN=2,400,000
10,000,000
450,000
450,000
450,000
450,000
MEDIAN=450,000 MEAN=2,360,000
The median shows a 10% decline, while the mean shows not even a 2% decline.
Comment by Vadim — August 6, 2006 @ 9:15 pm
Here are a couple of factors that you don’t hear discussed in regard to the supposed continued appreciation in the high end markets:
1) This category of homes has a much greater percentage of “tear-down” remodels and extensive remodels in general. Hence, the median home being sold each year is a moving target. Appreciation should be a measure of the increased value of the same item — not a “new and improved” one.
2) The percentage of homes in this category that are second/vacation homes is higher than in less expensive markets. I suspect that many of the most expensive homes in this category fall into this category (versus the typical 3BR/2BA ranch style.) One would expect that second/vacation homes are more liquid than primary residences. The supposed continued appreciation at the higher end could in fact be an increased turn-over of these second/vacation homes even if they are selling at a *reduced* price. I.e.:
Year 1: sales
1,100,000
1,300,000
1,500,000
1,700,000
Comment by sd_watcher — August 13, 2007 @ 9:17 am
Hey! I was searching for a totally different kind of thing and i spent such time to visit all around. I post only now, but this so good article on this page is so impressive, that I just have thing to say to you thanks for this very instersting point of view and thanks again for all the great works you did for this article here.See you
Comment by mtech — November 10, 2009 @ 2:41 pm