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Moving on Up! Explaining Today’s Home Prices.

There are hundreds of news articles and blog posts each day pontificating on the current housing market. Many of these stories try to examine pricing to help determine whether home values are appreciating or depreciating. The authors want to try their best to call the ‘bottom’ of the market based on the data available.

However, there is no shortage of house pricing indexes and, many times, they seem to contradict each other. Today, we will try to bring some clarity to the situation by looking at these indexes along side reports of “the move-up buyer.”

To begin with, we must make sure we are comparing apples to apples. Some indexes report year-over-year prices, some month-over-month prices and some do both. Year-over-year means they compare prices this month to the same month last year. Month-over-month means they compare this month’s prices vs. last month’s prices. Let’s look at what that difference can mean in the chart below which includes some of the best known pricing indexes (all are the most recent reports which covered November):

As we can see, there could be a big difference between the Y-O-Y to M-O-M comparisons. The chart shows that prices remained relatively stable over the last month even though it also shows that prices dropped between 3.3% to 7.2% over the last year. We need to know what the headlines are actually reporting.

We must also realize that, even if the average price goes up, it doesn’t mean that individual home values are necessarily appreciating. It could mean that buyers are buying bigger homes. With the home buyer’s tax credit expanded to move-up buyers, it would only make sense that there will be more move-up buyers in the market, and that they buy larger homes than their original home. These homes sell at higher prices.

As a matter of fact, the National Association of Realtors explained in their last Existing Home Sales report:

An NAR practitioner survey shows first-time buyers purchased 43 percent of homes in December, down from 51 percent in November. Repeat buyers rose to 42 percent of transactions in December from 37 percent in November.

That ‘repeat buyer’ will remain a stronger percentage of all buyers throughout the first half of 2010. Therefore, higher priced homes will sell, causing the average sales price to increase. Again, this does not mean homes are appreciating in value!

A rather startling example of this point came up in a panel discussioin during the Inman News Real Estate Conference in Manhattan earlier this month. During a panel discussion, Pat Stone, Chairman of the Stone Group announced that, yes, the average sales price would increase this year.

The reason: “Banks would be foreclosing on more luxury properties!”

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1 reply
  1. Jim Armstrong
    Jim Armstrong says:

    Great article. I’ve always said that most stats on home sale prices are very misleading. I always use the apple to apples comparison when talking with people about market conditions. Compare it to the automobile industry: if you have a year where more Chevys and Fords are being sold and less Lincolns and Cadillacs, the average sale price of a car would fall. That doesn’t mean the price of Cadillacs are falling, or even the price of Fords. It just means that more lower priced autos are selling.

    It is the same thing with real estate. In the past couple of year the first-time home buyer has been driving the market, which coupled with sales of bank-owned and short-sale properties drove down the average home sale price – but not necessarily the average home value. But unfortunately it escalates because of the perception that people have, with the help of the media, and the fact that lenders consider recent home sales the same thing as a home’s value and are using distressed properties as comps when doing appraisals.

    There’s no doubt that home prices had some ridiculous price increases during the early to mid 2000’s, and the market had to have a turn-down (just like it has done several times before), but the gloom & doom naysayers help drive down the perception of the real estate market starting in 2006-2007. Rather than look at real apple to apple (or 1950’s Cape to 1950’s Cape) numbers, they looked at the total market, which included foreclosures and eventually short sales.

    Now the real estate market is not just that simple, but includes many other factors such as mortgage interest rates, types of loans being made, local economy, and too many others to name here.

    I’m not an economist, just my observations over the last decade.


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