Median home prices - steak and lobster
I see journalists and fellow real estate agents scratching their heads, trying to explain how median home sales statistics can barely decline in a year (5% from July 2006 to July 2007), while they can easily cite examples of neighborhoods where home prices have declined 20% to 25% in a single year - sometimes in a single quarter. Are those examples anomalies? No, they are clues that help explain what’s happening, and they are totally different indicators.
This is a 2007 phenomenon, and an analogy to current home buyer behavior is as simple as shopping for beef steak in the supermarket. You like t-bones but can only afford chuck, so that’s what you normally buy. One week, a big sale knocks the price of t-bone, ribeye, and other tasty cuts down a bit. Some folks buy more chuck, but you just need one steak, and you might decide… time to splurge, a t-bone steak is not much more than you usually pay for chuck! Skip the catfish and feast on the lobster when it’s in season and prices are low, right?
Home buyers are getting nice steak now
In today’s housing market, that decision is being made every day by home buyers. Buyers are watching prices go down and some are realizing that they can purchase a 4 bedroom home in a nicer neighborhood for what they might have paid for a low-end three bedroom home just a year ago. So while the price of an individual home has declined, we discover that, to some extent, the median price actually measures what buyers are willing to pay for a house (closed sales), not what is happening to home values, and that in July 2007, half the homes in Palm Beach County are still selling for more than $372,200, just 5% less than a year ago. What does that buy you today? You can probably find a 4 or 5 bedroom home built after 2001, instead of a large 3 bedroom home a year ago. Prices of both have gone down about 20% but some buyers have simply adjusted their searches and upgraded a bit. Others may have reduced their outlays and saved money because of the declines, but it seems a significant number of people are still paying closer to what they paid a year ago, and getting more house for it. The high inventory levels have contributed to this effect.
By the way, economists have advanced theories to help explain this behavior. It’s not as simple as straight “supply and demand” because we’re dealing with a supply of homes ranging all the way from simple to luxury. But as prices become more affordable (individual home sellers make their prices more attractive), buyer behavior changes as each individual buyer’s marginal utility is affected by what they can get for the same budget. Something to always be aware of - we’re not lemmings, and buyers and sellers will react to many factors to make their decisions.
Another theory - median stats fueled the start of the boom
Now if we go back in time, to 2004, when the local media was gushing about the real estate boom and median prices were increasing by 10-20% from the previous year, was that also saying individual homes went up that much? Not necessarily… there may have been more buyers in the market purchasing higher priced, better featured homes, thanks to the easily available credit and low rates (you get a raise or promotion… so you start buying t-bones more often because you can afford them) and more affluent buyers coming in to Florida from other states. But the news reporting (and other experts looking at the stats) implied prices going up, which influenced individual sellers to ask more, so they did, and sold for more, and thus in the limited inventory market the boom was fueled by these expectations and anticipation of even higher prices next year. We were tricked by statistics into paying more for the same house. Something that needs repeating, news reports should focus on the now rather than speculating on the future, because they also affect buyer and seller decisions.
In my next post, we’ll see some examples of neighborhood price changes and what you can buy today versus a year ago. If you’re a buyer, it’s a good time to grab a nice steak… get out and shop!