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| Monday, May 28, 2007 |
| How to better measure home prices? |
As shown in the previous post, the median price is far from an ideal measure of home prices. In this softened housing market, a change in the types of houses sold may give people a deceiving picture of increasing prices. Here is an article titled The Follies of Measuring Home Prices from Rich Toscano.
In short, the median house is really a moving target, and the "median price" does not account for the difference in these houses and is therefore subject to the following follies:
- Changes in who's doing the buying
. If only the rich are still buying the beachfront properties, we may see the median price increasing sharply in a declining housing market.
- Changes in what buyers are getting for the money
. "During the boom, as buyers reached the upper limit of what they could spend, they compensated for the lack of affordability by lowering their standards and buying less desirable homes. So for a couple of years, there, changes to the median price actually understated the extent to which individual home prices were increasing. Since the boom ended, the opposite has happened. Now, the extent to which buyers have been able to get more and more bang for their homebuying buck has not been entirely reflected in changes to the Median purchase price."
- Home improvements
- Seller concessions
. The above two have been covered well in the Media, which may value tens of thousands of dollars but not included in the median price.
One of the best solutions lies in the Case-Shiller Home Price Index (HPI), which measures market price changes based on repeat sales of individual homes. Here is a graph featuring a comparison between Median Price and Case-Shiller HPI on San Diego's housing market.
Looking at the Median Price (the red bars), you may think that San Diego's Housing market hit the bottom b/w 09/2006 -11/2006 and rebounded back this year. However, CS HPI (the blue bars) shows a consistent decline throughout. Which one is correct? Correlating with sales volumn, we known the latter is the true picture.
For more metro areas and longer periods, you can plot graphs on the http://macromarkets.com.
To get individual home value and neighborhood demographics, I found http://www.cyberhomes.com/ very useful.Labels: Economics, Housing, Investment, personal finance |
posted by Yannick @ 7:06 AM |   |
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