John M. Lee: Statistically Speaking

As most of my readers of this column know by now, I tend to write on what I feel is the most relevant real estate topic at the moment. I get my ideas from the people I talk to every day. If certain questions come up often, that becomes the column of the month!

Lately, I have been getting many questions on published statistical reports and how the numbers relate to our marketplace. Why are the newspapers reporting that the real estate market is depressed and I have been getting beaten out so many times when making offers? Why is the media reporting that sales are down and yet I cannot negotiate on properties? Why is the median sales price going up when sales are going down?

The answers to these questions lie in the interpretation of statistical data.

For someone who is not familiar with the local real estate market and is purely examining and analyzing data, he or she will come to the wrong conclusions. So, let's look at several statistics that are commonly used in our industry to make sure we come away with the right analysis when we review the data.

The average sales price is computed by adding all the sales prices and dividing by the number of sales that occurred. Some reports use this number as indications of whether home prices are going up and down. The pitfall of this is that if a certain segment of the market does well, the analysis will be skewed.

For example, if more high-end homes are sold one year than another, then the average will be much higher. If the first-time home market is hot, and high-end homes are not selling, the average will be down.

The median sales price number attempts to address this pitfall. The median is defined as the middle sale where half of the sales are above this number and half below.

For example, if there are five sales at $750,000, $760,000, $775,000, $925,000 and $999,000, the median would be $775,000. As you can see, it is different from the average of $842,000. Most economists will use the median price as a better indication of price movement, but it can still lead to incorrect conclusions at times because there are micro-economies within the real estate market.

Prices in some areas can be moving up while a few miles away, they are moving down. Even a simple statistic like the number of sales can be subject to interpretation and is many times misinterpreted.

Many organizations publish annual sales forecasts and comment that the market will be down 20 percent in sales this year, making it sound like the real estate market will be depressed and prices will be falling. Then, at the end of the year the data might show that the number of sales did indeed fall 20 percent from last year, and yet prices are up 10 percent. How can that be?

Economically, that does not make sense since a slower market normally leads to price cutting and lower prices. What the stats do not tell is that the market is slower because sellers are not putting their homes on the market, and thus there are fewer sales. It is not because the demand is not there.

Thus, with a dwindling supply and constant demand, prices increase. Another statistically significant number which is crucial to real estate analysis but often much harder to obtain is months of inventory. This is defined as the amount of time it takes to sell the entire housing inventory currently on the market.

Currently in San Francisco, we have about two months of inventory on the market, a historically low number. That is why we have been seeing a torrid market this year.

In some of the outlying areas, we are seeing a six to seven months supply of homes and a very slow market.

Also, what confuses many people is the need to consider the source of the publication and the data sample they are reporting on. Some people will try to apply national data to the local market, which can be quite different. Statistical data does not lie, however the interpretation of the data needs to be considered within the context of local market factors, to come up with the right conclusions.

John M. Lee has an MBA from UCLA and is a top-selling broker at Pacific Union, specializing in the Richmond and Sunset districts. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.