This article was initially published in the Apr-Jun ’08 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.
Price comparisons are usually done by comparing a given period in the current year, usually either a month or the year-to-date, to the same period in the preceding year. This is done to remove cyclic biases. The assumption is made that a cyclic pattern of sales will remain reasonably constant from year to year. Median (midway) sales prices are normally used for comparison purposes rather than the arithmetical average (mean), as the mean is biased by unusually high or low sales prices. For example, if there were 100 sales at an average sales price (mean) of $500,000 and a $10,000,000 sale were added, it would raise the average sales price (mean) to almost $600,000 while the median sales price would be essentially unchanged.
The problem with using a median sale price is that it assumes the distribution of sales remains reasonably constant. That hasn’t been the case on Oahu since subprime lending problems were first identified in March 2008. The subprime lending problems resulted in stricter qualification criteria for borrowers. This had the greatest impact upon first-time homebuyers who often lack the funds for a down payment. As a result, sales of starter or less expensive homes were negatively impacted which caused the median sales price to increase; i.e., the distribution of sales was skewed towards higher prices compared to the same period the previous year.
A second problem unrelated to the mean/median is the fact that the housing market changes over time. A few years ago, it was a Sellers’ Market with multiple offers on new listings being relatively common. Today, it is a Buyers’ Market with buyers having far more negotiating power than they did previously. Today, a buyer spending $500,000 gets a better home than what they would have gotten a year or two ago for a similar $500,000 sales price. Or, from the sellers’ viewpoint, a seller who paid $500,000 for a home a few years ago, would be unlikely to be able to sell it for the same price today even though the median sales price may be unchanged.
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Average Sales Prices
This article was initially published in the Apr-Jun ’08 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.
Price comparisons are usually done by comparing a given period in the current year, usually either a month or the year-to-date, to the same period in the preceding year. This is done to remove cyclic biases. The assumption is made that a cyclic pattern of sales will remain reasonably constant from year to year. Median (midway) sales prices are normally used for comparison purposes rather than the arithmetical average (mean), as the mean is biased by unusually high or low sales prices. For example, if there were 100 sales at an average sales price (mean) of $500,000 and a $10,000,000 sale were added, it would raise the average sales price (mean) to almost $600,000 while the median sales price would be essentially unchanged.
The problem with using a median sale price is that it assumes the distribution of sales remains reasonably constant. That hasn’t been the case on Oahu since subprime lending problems were first identified in March 2008. The subprime lending problems resulted in stricter qualification criteria for borrowers. This had the greatest impact upon first-time homebuyers who often lack the funds for a down payment. As a result, sales of starter or less expensive homes were negatively impacted which caused the median sales price to increase; i.e., the distribution of sales was skewed towards higher prices compared to the same period the previous year.
A second problem unrelated to the mean/median is the fact that the housing market changes over time. A few years ago, it was a Sellers’ Market with multiple offers on new listings being relatively common. Today, it is a Buyers’ Market with buyers having far more negotiating power than they did previously. Today, a buyer spending $500,000 gets a better home than what they would have gotten a year or two ago for a similar $500,000 sales price. Or, from the sellers’ viewpoint, a seller who paid $500,000 for a home a few years ago, would be unlikely to be able to sell it for the same price today even though the median sales price may be unchanged.
Back to Useful Newsletter Articles