You Should See The World Through The Eyes of a Fly
If you want a clearer picture of what is going on in the real estate market, consider viewing the world through the eyes of a fly. A fly?
Absolutely. The fly's eye (as those of you who watch the discovery channel know) has a design known as the "compound eye" which allows the fly to see through a large number of lenses and at a wide angle. Each one of these optical units has its own lens and thus the fly is seeing a collage of hundreds of images as it views the world.
This is the technique that people must use to accurately report the state of the real estate market. No one particular chart or graph will tell you exactly what is going on in your real estate market. I regularly publish over 140 charts and graphs (with analysis) at the Tallahassee Real estate Blog because I think all of these compound views provide the understanding that I need in order to be the best real estate broker that I can be.
Currently, Lawrence Yun (NAR Chief Economist) is under a lot of heat for overstating REALTOR sales in the past. I find it sad that people even look to the lobbyist organization for market statistics in the first place. A smarter way for most people is to find the local real estate agent that really tracks local market activity.
The Fly's Eye View Of The Real Estate Market
Too often, I see well-meaning reporters (both real estate professionals and news media) speak about the median home sales price and real estate appreciation in the same sentence. We saw a wonderful example of this in yesterdays post when the US News and World Report announced home values plunged 91.48%.
While I know many people in the news media are going to be innumerate (that's a smart word by reader Roy which basically means "clueless in math"), I expect real estate professionals to know that median home price reports more accurately report "what buyers are currently able to pay" as opposed to "what sellers are able to get." Though it might not be in obvious to outsiders, those of in the industry should understand that. Here's why.
Interest rates go up, and interest rates come down. These changes affect the amount of home that a monthly payment can purchase (historically, well over 80% of homes are financed). So when interest rates drop, a $2000 per month payment buys "more house" than when interest rates rise. So is it possible that there is no direct correlation between median home prices and property values? Absolutely.
Did you ever consider that the "median home" is changing for each period of the median home price report? Using a simplistic-exaggeration to prove the point, lets say your market has too many homes (glut) and buyers are getting great values. This means home values are falling. If the typical buyer is going to borrow money, maybe right now his comfortable payment can get a 3 Bedroom house for $2000 per month. If interest rates stay the same, but property values drop, maybe six months from now that $2000 monthly payment might be able to cover a 4 Bedroom house. So median prices stay the same, but the median house has got bigger!
This simplistic example shows how right now median price means very little when we know values are dropping. Low interest rates are not getting buyers to have a lower monthly payment, rather it is allowing them to purchase more home.
So the next time an innumerate reporter (or REALTOR®) shows a median home price report, use the eyes of a fly and take in the whole image. Look at the report and ask yourself "if the average buyer paid $142K in last month, I wonder how much home they bought?" Then look at all the other real estate market reports (like pending home sales, recent failure rates, etc.) before you finalize your opinion on the local market.
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