“Parts of Area Housing Market Almost Back to Pre-Recession Levels”
That’s the headline in a recent Washington Examiner article about the state of the
region’s real estate market. Um...we think there are a lot of sellers
who would call the veracity of that attention-grabber into question.
What the article goes on to say is that the median sales price in Washington, DC is now nearly 90% of its peak in June 2006. (There were several jurisdictions mentioned that are nowhere near their peak levels, by the way.) While that may be statistically accurate, we respectfully submit that the headline confuses a mathematical calculation with a home’s value.
Remember that the “median” is simply the midpoint of a list of numbers ranked highest to lowest. As such, a change in the mix of what is selling can have a significant impact on the “median” value. The table at right shows the impact. In month 1, there are 15 homes that sold, ranging from a low of $300,000 to a high of $1,000,000. The median price is $650,000. In month 2, 13 of these same homes sell for exactly the same price as the previous month, but the two most expensive homes are dropped from the list. So even though there’s no change in the actual sales prices, the median price drops $50,000. And in month 3, 13 of these same homes sell again at the same price, but this time the two least expensive homes don’t sell – the median price increases $50,000.
Given current market conditions and recent changes that make getting a mortgage a bit more difficult, there are fewer first-time home buyers right now. As a result, there’s been a drop in the number of lower-priced homes selling. There were 58 sales under $150,000 in Washington, DC in October 2010 and 39 such sales in October 2011. As a result, the median price would rise simply because there are fewer low-priced sales on the list. Another example: the median sales price of all homes sold in Washington, DC was 5.24% higher in October 2011 than the same month of 2010. Does anyone really believe that home values have risen more than 5% in the last year?
Anyone who has read MarketWatch over the years knows that we like statistics, and we try to use them to help educate our clients so that they can make sound real estate decisions. But we try to be very careful about placing the numbers in context, with an effort to explain what they mean and what they don’t mean. And that’s why we don’t focus on average and median prices in our reports – they can be very misleading
We’re as optimistic as anyone about the long-term prospects for the Washington, DC real estate market, but the reality is that home values are nowhere near their boom-market peak. Don’t be fooled into thinking a simple arithmetic computation means anything – only a careful analysis of an individual property will give a buyer or seller a good idea of the value of that home.
Absorption Rate by Property Type
The following tables track absorption rate by property type, comparing the rates in the just-completed month to the rates in the same month of the previous year. The absorption rate is a measure of the health of the market, and tracks the percentage of homes that were on the market during the given month and in the given price range that went under contract. [The formula is # Contracts/(# Contracts + # Available).] An example: The absorption rate for attached homes priced between $750,000 and $999,999 in October 2011 was 25.3%, indicating that a quarter of the homes on the market for this category of homes went under contract in October. That compares to a rate of 22.6% in October 2010, and the increase means the market was better in 2011 for that type of home. If the absorption rate was less in 2011 than in 2010, we have put the more recent absorption rate in red. This month there was improvement for 12 of the 18 individual price categories.
CONDOS AND CO-OPS
- The overall absorption rate for condos and co-ops for October was 18.7%, an increase from the 13.6% rate in October 2010.
- The absorption rate for condos across all price ranges is more balanced in DC than anywhere else in the region.
- The overall absorption rate for attached homes for October was 26.2%, an increase from the 19.9% rate in October 2010.
- Again, look at the balance across most price ranges.
- October 2011’s absorption rate for detached homes was 22.0%, a decrease from 17.9% in October 2010.
- And the balance among the price ranges is evident here as well.