Wednesday, February 28, 2018

About those home prices: median or average as a trend indicator



            A recent newspaper report based on the annual Central Oregon Real Estate Forecast points out that the difference in statistical methods of calculating home price trends can lead to misleading conclusions.
            In a February article the Bend Bulletin headlined that Bend single family home prices for 2017 had reached an all time high average of $466,926. The statistics were reported by ECONorthwest which credited its source as the Multiple Listing Service of Central Oregon database.
            For those close to the real estate market this was not an unecessarily astounding number. But it nevertheless can create confusion among some homebuyers or sellers who may have earlier heard that Bend’s prices were still under $400,000.
            The issue is whether prices are computed as “average” or “median” statistics. Average is common to most anyone who has passed elementary school math. So 2 plus 2 plus 4, plus 8 is 16 divided by 4 yields an average of 4. But the same set of numbers yields a median of 3, meaning that an equal number of these numbers, if you will, is greater than and less than 3.
            Percentage wise, in analyzing larger numbers the divergence of average and median becomes more significant.
Source: Beacon Report for 2017/MLSCO
            In the case of Bend home prices, the gap between the $466,926 average reported by the Bulletin from the forecast and the year-end median of $395,500 calculated for 2017 from a report by Beacon Appriasal was 18% - a dramatic difference.
            Many analysts would prefer median as a more accurate tool, given that a few especially large sale prices, or lower ones as well, can abnormally skew the trendline. And the overall median price for a single year is more meaningful than any individual month.
            In the Beacon Appraisal report, derived from the MLSCO database, the highest monthly median sale price for 2017 was $418,000 in September, but that dropped to $390,000 in November before rising to $395,000 in December.
            In other points made in the ECONorthwest report:
  • Although home prices continued to increase each quarter of 2017 the price per square showed only a slight rise.
  • New home sales had only “minimal” price premiums over existing homes.
  • 24% of Bend sales were for all cash without financing.