Every month, the national media trot out a few statistics on what they say are the changes in the value of homes in the United States. Worse than the irresponsible reporting of data that is so generalized that it has no real meaning, is that most homeowners and buyers across the country rely upon these “national” statistics which are, in fact, highly misleading, since they mean absolutely nothing to the value of homes in any specific market area.

It’s important to understand, that these national stats include sales from all over this huge country, including vast numbers of homes being sold to investors in the decimated areas of places, such as Detroit, Michigan, where houses actually sell for $1,000.00. And, while there are numerous sales of very low priced homes in similar places that are equally undesirable, those sales have absolutely no meaning nor impact on the value of homes in highly desirable places, such as in the northwest valley in the Phoenix area, including North Phoenix, Glendale, Peoria, and several other locations in the area.

In fact, the mathematical “average” sale price (a/k/a the statistical “mean”), in and of itself, is a highly misleading indicator because it is so heavily influenced by the number of either low-priced or high-priced homes being sold in a given area.

For example, if 50 houses were sold in a given area, and 35 of them were foreclosures that sold at auction for about $125,000 (regardless of their true market value), and there were 15 homes sold at their true market value of about $350,000, the “average” sale price in that area would be $192,500. However, if the data were reversed, with 35 homes selling at $350,000 and 15 selling at $125,000, the “average” sale price in the area would change to $282,500. That’s a $90,000 swing; under current reporting standards, this would be reported as an “increase in market value of 46.75%” which is also misleading.

Another important factor regarding the misleading indication from using an “average sale price” to determine that values are either dropping or increasing, is the fact, that in times of economic recession or contraction, buyers tend to buy the lowest priced home vs. reaching for a higher priced home. This is simply a fact of human nature which results in more sales of lower priced homes in a given market area; it also contributes to the illusion that the “average” price is “going down.” However, this doesn’t mean that the value of higher priced homes is declining; it simply means there are more lower priced homes being sold than there are higher priced homes being sold in that market area at a given point in time.

In the end, the most important thing that homeowners and buyers can do to understand the changes in the value of real estate within their specific market area, is to consult with an active real estate agent in their market area, and to have that agent run a current statistical sales analysis for homes in the same specific location, and are the same age, size, design, utility, and condition as the home in question. This is the only way to know the reasonable value of the specific property type in question, as well as the best way to detect the value trend for that home in that area.

Also, be sure to compare homes sold by homeowners in the same financial circumstance as the homeowner who is selling; to compare foreclosed or short-sale homes to a home being sold by an owner who is not in a financially distressed situation will provide a very misleading result.

I offer this service to any homeowner or buyer in my market area (provided they are not in either a listing contract or a buyer-agency contract with another licensed real estate agent); it is absolutely free of any charge or obligation.

This entry was posted on Monday, October 12th, 2009 at 6:36 pm and is filed under The Economy, Uncategorized, Valuation Issues. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.