Is The Price Really Right?

“If you want to invest in real estate,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online foreclosure marketplace, “then information is king. You want as much information as possible and you want something else: information that’s relevant to the local area where you have an interest in real estate.”

Probably the best-known pricing source is the National Association of Realtors. Every 30 days or so — and with justifiable fanfare — NAR releases nationwide sales and pricing figures for the most-recent month. Such figures are a big deal on Wall Street and get a huge amount of news coverage, in part because the NAR numbers are a useful index of nationwide real estate trends, especially when compared with values from the previous year.

But if you live on either coast, or in a big metro area, the numbers may make you wonder: “Is this for real? Is the median price for an existing home really $222,000 as NAR claimed for December? Where can I find such a home?” Well, in a lot of places such homes are as common as unicorns.

To get closer to the mark you need to look elsewhere. NAR has another set of pricing figures, the quarterly metro area data. This information seems to get less attention than the monthly numbers and that’s a shame because the quarterly figures are the more interesting statistics.

The reason the metro figures are so important is because they’re more localized than the national tallies. While the national figure is a black-and-white snapshot of the nation as a whole, results from 148 metro areas expose shades of gray, showing where the market is strong, where it’s quiet and where is may even be weak.

The problem is that both the national figures and the metro tallies lack a certain something that really would be useful to buyers and sellers.

What’s missing? Perspective!

A total of 148 metro areas were covered in the third quarter NAR report. Prices went up in 102 areas, up by double digits in 21 metro centers and down in 45 areas. One metro area saw no change.

So far, so good. We can see that roughly two-thirds of all metro areas enjoyed higher existing home sale prices and about a third experienced declines.

But is this what’s really happening?

The problem is that not all metro areas are equal. The “New York-Northern New Jersey-Long Island, NY-NJ-P” metro area had a population of 18,747,320 in 2005, according to the Census Bureau. In comparison, the Sioux Falls metro area had just 207,918 people.
Despite the huge size population differential, both areas are counted equally as single “metro areas” on NAR’s ledger.

But suppose we accounted for home sales differently, such as weighing metro areas by marketplace activity? Then we could get a truer reflection of marketplace trends.

If we start looking at metro activity we might also be able to deduce a better measure of real estate values, what modestly might be called the Miller Pricing Matrix. In this case we take the sales volume in a particular metro area and multiply it by existing home sales prices. Add the metro figures together and you can create a weighted and nuanced picture of regional and national pricing.

For instance, today you might have two metro areas where the average unit price for existing homes is $225,000. But looking deeper you might also find that one metro area has 7,000 quarterly sales at $150,000 while the other has 80,000 sales at $300,000. Yes, if you add $300,000 and $150,000 you get $450,000. If you divide by two you get an average of $225,000. But in reality, the figure from the larger metro area is vastly more significant because it represents far greater economic activity.

To see the real pricing impact of real estate transactions we multiply 7,000 unit sales times $150,000 to get $1.05 billion. We then multiply 80,000 unit sales times $300,000 to get $24.0 billion. Lastly, have total activity worth $25.05 billion divided by 87,000 transactions. The result is a weighted average price of $287,931 — and that’s a lot more than $225,000.

“The statistically-inclined are welcome to play with these ideas,” says RealyTrac’s Saccacio. “If we’re going to make investment decisions we have to know what homes are really worth, and which way the market is really moving. Data that gives us a deeper and more precise sense of marketplace trends should be welcomed by buyers and sellers as well as brokers and lenders.”

Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 90 newspapers.

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