Single Family Home Prices – are they up or down?

Sales are up and returning to normal levels (see last 2 blogs).
But what about prices?

The median price of SFHs in Marblehead bottomed in the first half of 2009. Since then the median price for each 6 month period has gone up compared with the same period the year before – until 2012. In the first half of this year the median price declined 11%. 11%!!!!

How can this be when almost daily we hear reports that prices have shown year on year increases across the country, while in Massachusetts areas such as Brookline and Weston (quite nice, but where’s the ocean?) have reached all-time highs.

This is where the weakness of median prices comes to the fore. If the exact same group of houses sells between one period and the next, then the median price will give an accurate picture of the market. But what if there is a shift in sale transactions? If there are more sales at the top end, the median price for the market overall will show an increase, even if prices at that top end are actually declining. Similarly, if there are more sales at the lower end of the market, even if prices there are increasing, the impact of more sales at lower prices will cause the median for the total market to fall.

And that is what happened in Marblehead late 2011 and early 2012. How can I tell? The median SFH price in Marblehead first reached $500,000 in 2004, dropped below $500,000 in 2008 and 2009, and has been back above that level since then. I track the percentage of SFHs that sell below $500,000. If that number is 50%, then the median price will be $500,000. Above 50% and the median price will drop below $500,000; below 50% and the median will be higher.

Although I track this data back to 2001, I will just talk about the last four years. The first chart shows median prices quarterly over that period; the second shows total sales, sales under $500k, and the percentage those sales represent of the total.

Look at Q1 2009. There were only 18 sales in that quarter and 16 of them were under $500k. Not surprisingly the median was $400k. In Q2 2011, by contrast, there were 52 sales with only 20 of them – 38% – under $500k and the median was $564k. There appears to be a pattern that when sales are low, more of them occur at lower prices.

I think what has happened over the last year is that, as it has become more obvious that the housing market generally is recovering, bargain hunters – whether first-time buyers or investors – have been buying lower priced homes, especially those which need some work. Thus, while sales have been increasing overall, a larger part of those sales, particularly in Q4 2011 and Q1 2012, were below $500k, with the consequent effect of lowering median prices overall.

I picked up on this pattern in my 2011 year-end review, with the following comment: “The fourth quarter was particularly interesting, as it included not only the sales at the upper end mentioned earlier but also a large number of properties at the lower end. It was almost as though there were two markets in Q4, with 35 sales below $600,000, 10 above $900,000, and none in between.”

From Q3 2011 to Q4 2011 total sales dropped slightly from 46 to 44, but sales under $500k increased from 18 to 23 and therefore the median price declined sharply.

Let’s look at 2012. In Q1 the number of sales dropped from 30 in 2011 to 24, while those under $500k fell by only 2. This produced a 58% ratio of sales under $500k and a median price of $467,500, down 5% from 2011.

In Q2 the number of sales increased by 19 compared with Q2 2011 and fully 15 of those increased sales were under $500k. Thus, the median price dropped 10% from 2011 to $506,500. But the percentage of sales under $500k dropped back from 58% in Q1 to 49%, so the median price jumped 8% from Q1.

In Q3, the number of sales dropped by 8 from Q2 and the number of sales under $500k dropped by 7, accounting for almost the entire drop. And with only 44% of sales under $500k, the median price moved up a further 6% from Q2.

What does all this mean? As always, it pays to look behind the headline numbers if you want to know what is really going on. My take is that we have gone through a period of increased activity at lower price levels and that this distorted the picture of what has been happening in the broader market. My year end 2011 review suggested that the market was returning to normal. I believe that the second half of 2012 will be seen as confirmation of that.

Based on sales to date in Q4 and looking at properties with an agreed offer which may close before year end (which is uncertain), my best guess is that the median price in Q4 will be about $535,000 and for the year about $517,000. If those estimates are correct, the figures could be presented either as evidence that the market is recovering strongly (Q4 prices up 15%!) or that the market had a flat year (prices down 1%).

Keep reading here and you will know what is really happening – the truth behind the numbers!

NB. A word about methodology. I use MLS data with some adjustments, the main one being that I exclude foreclosures and short sales. I have explained my reasons for this in past Marblehead Reporter reviews and will post a blog on this subject in the near future.

Caution also needs to be exercised because the number of sales is quite small. Not infrequently, there is a price gap of $5,000 or $10,000 between sales (and in one case recently $23,000, right at the median), meaning that one sale more or less would move the median price significantly. All these and other factors explain why my first report in 2009 was titled “Lies, Damned Lies and Statistics.”