If the median price goes up by 2% in one month in a zip code, does that mean you have 2% more value for your property? Should you add that 2% to a new listing or appraisal? Or since the median price rose by 75% from early 2012 in Sacramento County, does that mean you have 75% more value? Not necessarily.
NOTE: Understanding how the median price works is important for valuing properties and communicating with clients.
What is the median price? If you lined up all sales in a county or zip code from lowest to highest price, the median price would be the sale in the middle. Over time this figure can help us see how a market is moving, but applying median price increases from a zip code to a particular home can get us into quick trouble.
5 reasons why median price increases don’t translate to actual dollar for dollar increases:
Sales Volume: The monthly median price is based on how many sales there were in a given month. If there are few sales in a market, the median price could see a huge swing, which means it can go up and down very quickly (which means we should be very careful about applying the increase or decrease to our property’s valuation).- Less junk sales at the bottom: In 2012 and 2013 cash investors gutted the distressed market (low-priced short sales and foreclosures), and then flipped many of these low sales at higher levels. This essentially means the bottom of the market was removed. Now imagine the median price again, which is the sale in the middle of all sales if you lined them up by price. All of the sudden the sale in the middle got much higher because the bottom distressed part of the market was removed in a short period of time. Thus the market on paper shows very significant median price increases, but that’s really because of the bottom disappearing, right?
- Seasonal Moods: The median price tends to see a huge uptick during the early Spring.. For instance, imagine the median price increased by $25,000 from January to March. Does this mean values increased by $25,000? Not necessarily. It’s just the stale sales from Fall were much lower in price, and now current values are in high gear for the Spring (which is normal for Spring). Sometimes values in the beginning of the Spring are aggressive and they seem incredibly high, but in reality they might be picking up where the market left off at the end of Summer (or maybe slightly above). This is why we need to look at sales well beyond just the past 90 days.
- Larger Homes: Imagine there were larger-sized homes that sold last month compared to the previous month. We might look at the median price and say, “Wow, look how much the market increased last month”, but in reality there were simply bigger homes that sold at higher levels that made the median price increase.
- Zip Code vs Neighborhood: Not every neighborhood is experiencing the same trends as the entire zip code, and not every price range behaves the same way either. The zip code might show a 2% monthly increase in median price, but are neighborhood listings being priced higher or lower than recent sales? Are listings spending longer or shorter times on the market? Are sellers getting what they ask for? We have to be sure to take a hyper-local look at sales and listings in the immediate neighborhood before blindly applying zip code trends. The zip code might show a 2% median price increase, but maybe after looking at the numbers in the neighborhood itself, values in the neighborhood increased very modestly by maybe 0.50 to 1.0% in actual value over the month.
I hope this was helpful. As always, thank you sincerely for reading.
Question: Anything else you’d add? I’d love to hear your take.
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Ryan, when did you grow a beard and ‘stash? (grin)
Mike, if I wasn’t so gray in the beard, I’d have one in a heartbeat. I usually grow one and then end up looking in the mirror thinking, “Who is this old guy?” That’s a quick way to get me to shave. 🙂 Hope you’re doing well.
Great list. In my market I’ve, at times, had to use a comparable sale that sold in January and make a very large adjustment to it for only a short time period as a result of the normal swing we get from the low in January to the quick up swing in price in April or May. Back when I did lender work, I would have to write a book supporting the adjustment because bank reviewers would not believe it and harass the appraiser with multiple revisions.
Thanks Gary. Writing that novel for support is a familiar thing in lender work. 🙂
Good thing you have a novel writer on the payroll 😉
Regarding #3, seasonality varies a lot from city to city. Looking at Case-Shiller charts, seasonality appears to be strongest in Chicago, Boston, Seattle and New York and weakest (essentially no price seasonality) in Miami, Phoenix, Las Vegas and Los Angeles. At least according to Case-Shiller data.
Hi Ryan, To me any median price data in the short term is practically meaningless. For this data to have any meaning, it needs to be compared to historical median data. The more years you can go back and mine median data, the better you can make correct assumptions.
Wayne, this is a very good point, and I’m glad you made it. Thank you. Your point underscores that the median price is a valuable metric (but in the right context). Still though, there are many who price properties based on monthly changes in the median price. We have to be careful of that. In truth, understanding how price trends work isn’t something that is readily known in the real estate community. It’s something that has to be learned over time through studying the market, experience, and/or being mentored. Knowing sure can make all the difference with how we approach value. Thanks Wayne.
Ryan, thanks for another easy-to-understand and informative post. Your blog is one of the few I always make time to read. Keep up the great work.
That’s a very high compliment, Ray. Thank you sincerely. It’s always nice to hear something so encouraging, and it makes my day.
Very good points Ryan. In appraising it is never black and white and the best answer is usually “it depends”.
Thanks Tom. So true on “it depends”. 🙂
Good piece on the median value. Many times I have assignments to reappraise a subject I saw 7, 8 maybe 15 years ago. The question from some is “gee it was higher in 2007…”. Going deeper into the explanation of what does comprise “comparable data” and how that mix of sales change to render a different median for today’s data set is likened to a cork on a tide – is today’s tide the same as 2007? How about our cork, does it float as well as it did 8 years ago? Nothing is static, subject and market change over time. Thanks Ryan!
Thanks Mark. I like your cork comparison. I’m always for a good analogy, and I appreciate your attention to detail. There is a huge void in the real estate community for understanding how the median price really works, so having a good grasp of it can be really helpful in so many ways for us as appraisers and agents too. For instance, I just pulled some stats the other day for a post someone is writing, and it was interesting to see the median price having risen by 215% in a particular neighborhood in Sacramento since Q1 2012. Does this mean every property increased in value by 215%? No. There has been substantial appreciation, but not every property has seen a 215% value boost.