John M. Lee: How to interpret data
I have been monitoring the news wires this month regarding real estate. What I found has been interesting and makes me think of explanations as to how to interpret the data.
On April 17, Dataquick reported that the median sales price of single-family homes and condos decreased in all nine Bay Area counties with the exception of San Francisco, which had an 0.3 percent increase. It also reported that the number of sales were down about 21 percent in San Francisco, while other counties were down between 32 and 49 percent. This is consistent with other news sources that gather and publish information.
The first question that jumps into my mind is how can sales be down and prices up? This is seemingly counter intuitive as in business, lower sales generally translate into lower prices. For example, if a store has inventory and cannot sell it, it would need to have a sale and reduce prices to get rid of it. If you book hotels or airlines with rooms or seats they cannot fill at the last minute, you can get a good deal because they have to reduce the price.
However, real estate is unlike these types of products. If you are selling food, and there are no buyers, you end up throwing it away with no further economic benefits. And if your hotel rooms and airline seats sat empty, you lose the money you would have gotten even if you had sold it at a lower price. However if you hold on to real estate, it will appreciate over time; thus the value will never go to zero like other products.
Also, if you think about the law of economics, what is going on in today's San Francisco market is that sellers read all the ominous headlines in the newspapers, hear the negative reports on television, and decide to hold back on putting their properties up for sale, waiting for a better market.
Buyers hear and read the same things and think the market is still dropping, thus hold off on their purchase decisions until prices drop further.
So, what we have is a shift downwards of both the supply and demand curves, resulting in a new price equilibrium, which in San Francisco is slightly up from last year.
What happened in the areas where prices were down substantially?
What we are witnessing in those areas are many foreclosures and short sales, inflating the supply numbers with a dwindling number of buyers.
Another interesting news item that crossed my desk was the result of a Gallop poll where they interviewed 1,021 adults and asked them: "Do you think now is a good time or a bad time to buy a house?"
A surprising majority (53 percent) said that it was a good time to buy real estate.
When the results were broken down further, of the respondents making $35,000 or less per year, only 34 percent said it was a good time to buy a home; of those making between $35,000 and $75,000, 56 percent said it was a good time to buy; and of those making more than $75,000, 69 percent think it is a good time to purchase a home.
In the San Francisco area, a large majority of the potential buyers make more than $75,000 per year, which falls into the group that believes this is a good time to buy. Interest rates are still relatively low and some areas already had price corrections, resulting in total lower housing expenses as compared with the last few years. This also explains why our demand for housing in San Francisco is still good.
Interpreting real estate data is extremely complicated as different sources use different information to publish their data. Their assumptions often are in conflict with one another and cause confusion amongst readers. We have to review their studies and ensure consistency to form the correct conclusion.
John M. Lee graduated from UCLA with an MBA and specializes in the Richmond and Sunset districts. For questions regarding real estate, call (415) 447-6231 or e-mail [email protected].