“Parts of Area Housing Market Almost Back to Pre-Recession Levels”
That’s the headline in a recent Washington Examiner article about the state of the
region’s real estate market. Um...we think there are a lot of sellers
who would call the veracity of that attention-grabber into question.
What the article goes on to say is that the median sales price in Arlington County, Virginia is now nearly 95% of its peak in June 2006 – but doesn’t mention the fact that the median in Montgomery County, Maryland is only 78% of its top level. While that may be statistically accurate, we respectfully submit that the headline confuses a mathematical calculation with a home’s value.
Remember that the “median” is simply the midpoint of a list of numbers ranked highest to lowest. As such, a change in the mix of what is selling can have a significant impact on the “median” value. The table at right shows the impact. In month 1, there are 15 homes that sold, ranging from a low of $300,000 to a high of $1,000,000. The median price is $650,000. In month 2, 13 of these same homes sell for exactly the same price as the previous month, but the two most expensive homes are dropped from the list. So even though there’s no change in the actual sales prices, the median price drops $50,000. And in month 3, 13 of these same homes sell again at the same price, but this time the two least expensive homes don’t sell – the median price increases $50,000.
The reality is that, in good markets and bad, median prices skew dramatically from month-to-month and year-to-year. Example: the median sales price in Montgomery County was 6.5% lower in October 2011 than it was in October 2010. However, the median price just one month earlier in September 2011 was 3.7% higher than September 2010. Looking at median price as a key indicator, one might be tempted to draw the conclusion that there are some wild price swings going on in Montgomery County every month. The reality is something entirely different.
Anyone who has read MarketWatch over the years knows that we like statistics, and we try to use them to help educate our clients so that they can make sound real estate decisions. But we also try to be very careful about placing the numbers in context, with an effort to explain what they mean and what they don’t mean. And that’s why we don’t focus on average and median prices in our reports – they can be very misleading.
We’re as optimistic as anyone about the long-term prospects for the Montgomery County real estate market, but the reality is that home values are nowhere near their boom-market peak. Don’t be fooled into thinking a simple arithmetic computation means anything – only a careful analysis of an individual property will give a buyer or seller a good idea of the value of that home.
Absorption Rate by Property Type
Thefollowing tables track absorption rate by property type, comparing the rates in the just-completed month to the rates in the same month of the previous year. The absorption rate is a measure of the health of the market, and tracks the percentage of homes that were on the market during the given month and in the given price range that went under contract. [The formula is # Contracts/(# Contracts + # Available).] An example: The absorption rate for detached homes priced between $300,000 and $499,999 in October 2011 was 20.6%, indicating that one fifth of the homes on the market for this category of homes went under contract in October. That compares to a rate of 19.0% in October 2010, and the increase means the market was better in 2011 for that type of home. If the absorption rate was less in 2011 than in 2010, we have put the more recent absorption rate in red. This month there was improvement for 8 of 17 individual categories with activity.
CONDOS AND CO-OPS
- The overall absorption rate for condos and co-ops for October 2011 was 24.5%, an increase from the 17.7% rate in October 2010.
- The overall absorption rate for attached homes for October 2011 was 28.0%, down slightly from the 28.6% rate in October 2010.
- October 2011’s absorption rate for detached homes was 19.6%, almost the same as the 19.7% rate of October 2010.
- And as we have seen in the other property types, the absorption rates are higher for the lower-priced categories.