Don’t put all your eggs in the median price basket

Median price figures can be helpful to understand the real estate market, but at the same time we need to be careful not to give them too much weight. Today let’s look at some of the pitfalls of paying too much attention to the median price level.

First off, what is a median price? Imagine lining up 50 sales and placing them in order from highest to lowest. The median price is the sale in the middle of the group. For example, when we hear that the median sales price in the Sacramento area is now at $203,000, that means half the sales are above that point and the other half are below that point.

Some pitfalls of relying too much on median price levels:

1. Inventory: The median price is based on the number of recent sales. When there are few sales in a market, the median price tends to be less reliable because it can go up and down very quickly depending on just a few sales.
2. Size: If there are more smaller-sized less expensive homes that sold recently, the median sales price will naturally be lower. But if there are a greater number of larger and more expensive homes, the median sales price could be higher. Thus the median price is strongly influenced by what types of property have sold in a neighborhood (see graph below).
3. Big Market vs. Sub-market: City-wide median sales price trends may or may not apply to every single neighborhood in a given city. For instance, Midtown Sacramento may be experiencing a bit of an uptick lately in values, but my observation is that it is not the same as the huge increases we’re seeing in some newer suburban tract neighborhoods. Sometimes during the appraisal process I’ll observe increasing values for an entire city, but a more stable value trend for a sub-market.
4. The Layers of Value: It’s important to know what is shaping the median price level for a neighborhood or market area. For instance, we might see the median sales price has increased by 20% over the year in a particular community, but when looking closely at the trends, there are less foreclosures at the bottom of the market, more flipped properties at the top and less inventory overall. These combined factors can help boost the median sales price to make a market look beefier than it really is.

Keep it in Context: Ultimately if you want more accurate valuation results, instead of only looking at market-wide median price figures, look at competitive data in the context of your neighborhood. What do I mean? Stay within the neighborhood boundaries and compare your property to other similar sales (instead of all neighborhood sales). When you begin to get median price figures or price per square foot figures for these competitive sales, you’ll likely start to get a more realistic value picture for your property.

The median price is one metric to help us understand the real estate market, and it’s definitely not the end-all lense to interpret the market. My advice? Know what influences the median price and take the median sales price for what it’s worth.

Any thought or stories to share?

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