"County Real Estate Prices Increase, Sales Decrease"

What does this REALLY mean?

An article appeared recently in one of our local newspapers that left many people with confusion. I received more than a few calls from some of my clients wondering how the median home price can be going up if sales are going down. The article discussed two separate topics as if they are closely correlated. The truth is: These issues are related, but not in the way we are led to believe.

The median home price is defined as "the statistical point where half of the homes sell for more and half sell for less." This statistic can be misleading because it is strongly affected by variations in buyer behavior. To illustrate this point, let's assume that 9 homes sold in each of two different one week periods, with prices as follows:

Week 1 Week 2

$400,000 $450,000

$450,000 $500,000

$500,000 $550,000

$550,000 $600,000

$600,000 $650,000

$650,000 $700,000

$700,000 $750,000

$750,000 $800,000

$800,000 $850,000

In the example, the median home selling price in week 1 is $600,000 and in week 2 is $650,000. One could say the median home price increased by $50,000 (or 8%) in one week. The only difference in the data is that in week one a house sold for $400,000 and in week two there was a sale for $850,000. It's easy to see now that the median home sale price merely indicates buyer behavior, and not necessarily house values.

The second issue that must be examined is that of declining (or even increasing) sales. Two dates are important to consider here, the date that the property went into escrow and the date escrow closed. Property sale statistics are typically gathered from county recordings of grant deeds on the date of close of escrow. Since the average escrow period can be anywhere from 30 to 90 days from the date an offer is accepted on a property, sales in June indicate a decision to purchase, made by a buyer, in either March, April, or May.

There are two significant categories of buyers whose activity has decreased in San Luis Obispo County over the past few months: Investors and first-time home buyers. Both of these types of home buyers are more sensitive to fluctuations in home values, and their inactivity can be largely responsible for a decrease in sales. The majority of home sales today are among move-up or move-down buyers (who are often selling and buying), and buyers relocating into the area. These buyers have equity and/or other resources to enable them to participate in this market.

Hopefully by now it is becoming evident how declining sales can actually cause the median price of homes to go higher. The demographics of today's buyers are such that they are more active in the middle to upper price ranges. With the absence of many investors and first-time buyers it is the middle and upper price homes that are selling, causing the median home price to increase.

The important thing to keep in mind is that an increase in median home price does not automatically indicate that the value of real estate is increasing. Consequently, a lower median sale price does not necessarily indicate falling property values. Like most industries real estate is strongly driven by supply and demand. Today our supply is higher, and demand lower than in the previous few years. It can be said with accuracy that our local real estate market is currently a "buyer's market". In a buyer's market the buyer will have a strong influence on values. That, however, is another topic altogether.

-Randy Steiger