Understanding Real Estate Numbers
What is the real estate market doing? You might think that this is an easy question to answer given that every day you we see articles in the paper about what is happening to housing values. Unfortunately, there’s no easy answer to this question.
You can’t tell what the weather is going to be like in your area by looking at some kind of national average. Those averages may be important to scientists who are tracking long-range trends like global warming, but they can’t tell you whether you ought to take an umbrella with you today. The same thing is true about housing values. The only data that are important to you are those in the immediate local area where you are interested in buying or selling property.
There are several organizations that track sales data, and it is important to understand the differences between them. The one most likely to be mentioned is Dataquick. They keep track of all the sales and enter them into a database that is the foundation of the appraisers when they appraise a property. Appraisers are interested in comparable sales, and they get that information from Dataquick. That information is updated on a very regular basis from information that is gleaned from County records.
Often the County gets some kind of fee, a “sales tax,” on these sales so they know what the sales price was. They also know the square footage of each home via the building permits from when the house was initially planned, approved, and built. They know about subsequent changes to the house from more recent building permits.
Dataquick reports MEDIAN prices. A MEDIAN is the value at which half the homes sold for less and half sold for more. For example, if there were 1,000 sales, 500 sold for more than the MEDIAN price of, say, $325,000, and half sold for less. The problem with this method is that if you have slowness in one part of a market, say very high-end (expensive!) homes, this can quickly skew the numbers.
Say that the over $1 million home market slows. That would mean that the sales of homes at the low end of the spectrum would outnumber the higher end. That might mean the MEDIAN price would drop to $320,000, a small decline from $325,000. But it might be that individual homes in the $300,000 range would actually go UP in value, not down. In this case, the information that the MEDIAN price declined would not be relevant in helping you figure out what to do with a particular property.
The pace of new home sales can have a disproportionate effect on this market reading too, as builders generally build homes that are worth more than the average values in the community. If builders are building $500,000 homes in our mythical city and the market it hot, that would raise the MEDIAN price even though values around the average might be unchanged. The MEDIAN price is useful when values are going up 10% or 20% every year, but at that point in time everyone knows that anyway.
Associations of Realtors also keep track of sales through their Multiple Listing Services (MLS). These data show the price of homes that are listed and sold by member agents. It would not show For Sale By Owner (FSBO) sales and might or might not show sales of new homes sold by a builder for the first time. In many markets, these data might be accurate for 80% of the sales. It can be unclear whether the sales they do not show really would have an impact on the numbers.
Data also comes from the Office of Housing Enterprise Oversight, which tracks information on sales and refinance activity of the two agencies it oversees, FannieMae and FreddieMac. In this case, they look at homes that got loans less than the Conforming loan limit, currently $417,000. That means that in markets where the values are substantially higher, such as in parts of California, a huge chunk of the homes sold are not included in the calculations. That does not mean that the value of homes in the lower end of the market isn’t accurate; you just have to be careful.
What does this mean? Just like the weather, you need to look at values in the particular neighborhood you are interested in. If you want to buy a condo for $175,000, the only data that are important to you are the sales data for homes in this slice of the market in the neighborhood you are interested in. What is going on up the hill or farther out of town just isn’t relevant. Overall market data aren’t very useful either, unless you are a reporter trying to figure out what to write about.
Getting really local information is what’s relevant to you, just as it is when you are trying to decide whether to take along an umbrella! In the future, we’ll discuss some resources available on the Internet, but only after I’ve figured out how accurate they are.
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