Why numbers do matter – but so does a good agent
In my new career as a Realtor I recently attended a class on using the data in the MLS (Multiple Listing Service). Two comments struck me. The first came from an agent of more than 20 years’ experience who said: “I know my market; I don’t need data to tell me what a house is worth.”
The second came when the agents present were asked what they had been taught to say in response to the question: “how’s the market?” I was almost deafened as those present (this was a continuing education class) shouted out words like “great” and “terrific”. To which the instructor wryly commented that that was how Realtors got a bad name.
I am not setting out to criticize agents, individually or collectively. As a numbers wonk I am only too aware of the dangers of analysis paralysis – spending way too much time on data, rather than on sentiment and confidence and other huge factors in the home buying and selling decision process.
But let me ask you this question? Let’s say you have an investment in a Fidelity mutual fund and you read an interview with the manager who, when asked why he had made his largest investment, replied: “I had a feeling about the stock”. Really? With my money? Where’s the research?
Mutual fund companies employ research analysts; investment banks employ research analysts. All these individuals have at least an undergraduate degree and have passed the demanding Chartered Financial Analyst exams. Both sides do detailed analysis before decisions to buy or sell are taken.
Which is your bigger investment? Mutual funds? Or your house?
If you expect your mutual fund manager to go into detailed analysis before making an investment of your money, why should you be willing to do less – often far less – research before making the biggest financial investment of your life?
The real estate market has changed dramatically in recent years for one important reason: the internet. When most agents entered the business, they were the only people who had access to information about both properties available for sale and those that had sold. If you wanted to know what was going on, you had to talk to a real estate agent.
But all that has changed. Today, you, as a buyer or seller, provided you are willing to spend a little time, can find out almost as much information about recent transactions and also what is currently available (the competition if you are a seller) as most agents possess.
I say almost. You can certainly get the basic information, but what the agent will be able to tell you is what is happening right now: how many people are showing up at open houses, what the “buzz” is; and also specific features of houses either sold or available that may have affected their price. The agent is still a key part of the process.
All real estate firms, in response to the greater availability of information, produce their own statistics. Since most of these are taken from the MLS, they suffer from one big drawback: MLS uses for the most part average sales prices rather than median.
Why is this important? The average of eleven numbers is simply the sum of those numbers divided by 11. The median is the number which has an equal number higher and lower – in this case the 6th number.
Before your eyes gloss over, let me give you two examples
In a test at school the students score 2, 4, 5, 7, 8, 10, 12, 13 and 83. The “average” score is 16, but 8 of the 9 students scored less than this number. The “median”, that which has an equal number higher and lower – in this case the 5th of 9 – is 8, which gives a much better idea of the mid-point of the scores.
Let’s look at those numbers in real estate. In 2012 in Marblehead the average sale price for SFHs (excluding distressed sales) was $665,000. Yet if you read my year-end review you will see that the median price was $510,000, almost 25% lower. Why is that? Because SFH sales took place between $205,000 and $4,100,000, a huge range. Using average prices, the $4.1 million house was worth 20 of the $205,000 house, yet only one sale at each price took place.
Does that change if we use a narrower price range? Let’s look at SFH sales between $500,000 and $550,000. Here the average price was $525,744, while the median was $521,000. The difference now is insignificant, less than 1%.
So, yes, within a narrow range there is not likely to be much difference between average and median prices, but when an overall market is looked at, or a wider price range, the differences can be material: median gives a better, but not perfect, picture.
One of the reasons median is not perfect is that a shift in activity at different price levels can cause a move in the median price which does not reflect what is happening to actual prices. Please take a minute or two to read my year reviews of both the SFH and condo markets in Marblehead to see how just this phenomenon occurred in Marblehead in 2012 – and using numbers I can demonstrate that it happened.
This is not an intellectual exercise. Please, read the reviews and you will see that the SFH market for properties under $500,000 in Marblehead underwent a significant change in late 2012. Notice that I said “market…under $500,000”. There is very rarely one market. Different locations, different price ranges have different characteristics. A year or so I wrote that the more I look at and study the Marblehead market, the more I am convinced that there are about 6,000 “markets” in Marblehead, that being the number of SFHs.
And that is really what makes real estate the most fascinating and attractive investment. If 30 analysts follow GE their earnings estimates, using extensive models, are all going to be in a narrow range. But in real estate, two houses close to each other with similar characteristics can have widely ranging values, depending on a whole host of other factors, many of which are not known until one enters the house – and until a survey has been performed.
A question I have been asked is what I am trying to achieve with my articles. The answer is: an informed population of buyers and sellers. To that end, all my articles are available to everybody, including real estate agents of other firms, appraisers, lenders, etc. Why? Because I believe it is in the interests of everybody that we have an informed market.
In conclusion let me say this: real estate agents today have access to more and more detailed market analysis. But so do you, the buyer or seller. Should you not take advantage of that before you make a decision about your biggest asset?
Andrew:
Thank you for your recent post. I enjoyed reading it, though, if I interpreted it correctly, there is some disagreement..
Regarding your thoughts on determining values in a real estate market place, and your advocacy for use of the “numbers”, I agree more with the student in the continuing education course you attended that said, (paraphrase) “I know my market, and don’t get overly involved with the numbers.”
While advocating the use of numbers, you later said: “But in real estate, two houses close to each other with similar characteristics can have widely ranging values, depending on a whole host of other factors, many of which are not known until one enters the house – and until a survey has been performed.” That isn’t a big endorsement for spending too much time and energy on numbers.
You do prove that the only statistic, numbers, worthy of note, are medians, not means. But, any statistic is only meaningful when dealing with similar things, and the sample size is large enough to warrant credibility. In real estate, that would possibly come into play when analyzing track-type or development type housing.
In most real estate market places, particularly medium to small market places like Marblehead, consumer confidence data, and the information driving it: how the media is spinning and creating the news, peoples’ feelings about their job stability and security, car sales, sales of durable consumer goods, travel, eating out, …. combined with a Realtor’s knowledge of the inventory by going to broker open houses, discussions with other Realtors, being current on similar (comps) actives, under agreements, and solds, and a putting a lot time and thought into those factors, make for the most meaningful property and market place analysis.
Spending much time on averages, medians, and small sample-size derived numbers doesn’t bring much to the party, e.g., 2013 January sales of single family homes went up from 5 in 2012 to 7; a whopping 40% – interesting, but inconsequential when adding to the information the small sampling size. It is not information I would encourage any of my clients to place bets on.
One other note, your encouragement for buyers and sellers to take advantage of all the statistical real estate information available on the internet, is a good idea, but probably won’t happen beyond their staying updated on what’s on the current market: locations, prices, and pictures. Most people, even tech savvy young ones, don’t have the time, or will, to micro-manage their other investment financial affairs – their financial advisors do it – which are much less complex than working with all the data, variables, emotions, and other factors that play key roles in doing a meaningful real estate analysis. The anology is that it is like so many buyers who initially, bright eyed and bushy-tailed, enjoy seeing prospective properties, but find out that it is very time consuming (all during their “D” time), and gets frustrating and old real fast.
I very much liked your thought and its implications that buyers and sellers do need to be connected with a professional Realtor to tell them about, and help them, interpret what is going on in the market place, so they will be able to make their best business decisions.
Great article, Andrew, and now I am understanding much more about the median vs. the average process of evaluating data. This was very helpful. I have never really considered the median in my consultations and I will certainly be aware of this going forward. Thank you and keep up the good work! We all benefit from your thoughtful and insightful work.