Monday, November 24, 2008

Pay No Attention to Averages

Okay, seriously, this is getting way out of hand. The national media keep reporting national numbers related both to commercial and especially the housing market that are averages.

First, let's review the difference between an "average" and a "median," because you'll see both terms thrown about.

  • An average is a generalized number meant to represent any particular instance as a generic example. So, if there are 3 houses on a street worth i) $100,000, ii) $200,000, and iii) 400,000, then the average is $100k + $200k + $400k divided by 3 = $233,333 is the average price. But how useful is that if you're trying to figure out what your house is worth one street over? (Hint: Not very useful at all.) So averages are generic. And they're fine when the set of numbers being averaged fall into a close range.

  • A median is the number for which 1/2 of all things are above, and the other 1/2 are below. So in any neighborhood, if the median price of a home is $200,000, then that means that half of the homes in the neighborhood are priced above $200,000 and half of the homes are priced below $200,000. This is more helpful, but still does not tell the whole story.

So an average is really just a melting pot of statistics, and the bigger the pot, and the more things thrown in all melted together -- well how much does that average number really tell you? Not a lot, especially in real estate.

An "average" would be okay when talking about the national housing crisis if all parts of the country were experiencing basically the same problems and had the same history and outlook. But that's not at all the situation. There are parts of the country where the housing bubble absolutely exploded like Dutch tulips, beyond all reason. In other parts of the country, such as in Houston, housing prices never really accelerated all that much as new supply kept up with new demand.

Consequently, Houston is not seeing the same downturn that many other parts of the country are seeing -- because Houston never really saw the run-up that other parts of the country were seeing in the past 5 to 10 years. So Houstonians really need to look at their own local data to get a better grip on the local housing market and should really disregard the national reports when thinking about the local market.

The story in Houston right now is that while the number of sales are down over 20% year-over-year right now (last year there were about 20%+ more sales happening), the prices of those sales are actually holding firm within a couple percentage points, in stark contrast to the national statistics and especially the national averages.

In the future, we should discuss What Really Drives Real Estate Values of What You Own, and also what's behind the statistic "Average Months of Inventory." Both are confusing, even to people in the industry.

Update November 25, 2008: Here's another story with a big "price plunge" headline that Houstonians should ignore.