Many times I have said that using the median or average home sale price to determine appreciation rates can be misleading at times depending on changes in consumer buying habits. Dr. Mark Dotzour who is the chief economist at the Real Estate Center at Texas A&M has recently shown that he is in agreement. Below is a news feed from the Texas A&M Real Estate Center website giving two more preferred methods in gauging home price appreciation. I happen to agree with both but feel that the resale index choice tends to over state changes in market price in super heated markets and in markets that have a large number of foreclosures.
Using changes in median price or average price in the MLS to estimate the change in value of homes in any community in America does not give you a precise reading on what is happening to the price of individual homes in the community. The fact that median prices are up or down doesn’t give you a true measure of price changes, according to Dr. Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University.
Here are two ways that are more precise.
First, the OFHEO* repeat sales index is the best. It compares the prices of homes that have been sold and then resold again recently. This controls for the size issue. When a home sold two years ago for $100,000 and sold again today at $105,000, the indication is a 5 percent rate of appreciation over the past 24 months. It includes homes that are sold and refinanced.
Second, another measure would be to compare the SALES PRICE PER SF in the MLS database from, for example, Nov. 08 with Nov. 07. Here again, we can control for size changes and just see what has happened to the “price per pound” of real estate in the past twelve months.
Consequently, Dotzour concludes, there are two “facts.” First, the median sales price is down 3 percent. Second, the OFHEO price index shows values are up 2.55 percent from 3Q08. “If I am an investor or a potential homeowner, I would definitely put more weight on the OFHEO index.”
*Federal Housing Finance Agency (FHFA) monthly index (formerly called the OFHEO monthly house price index.
March 19th, 2009 at 10:19 am
You make a good point. I have often felt that median price was not always accurate, particularly when using a small number of sales, or in a small market.
I’d much rather use the price per square foot over time, for similar size properties.