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The Difference of a Drop in the Median Home Price and Actual Home Prices

January 29th, 2009
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I am often asked by my clients to explain the connection between the “Median” home price for our area and actual sales prices. Often a client will say “I have seen the HUGE drops in the median price for homes in Santa Rosa, but prices in my neighborhood don’t seem to have dropped quite as much, why is this?

The reason is that the Median Home Price is used to talk about the market because it is an easy market-wide statistic.  This statistic works ok in a normal market when the percentage of homes selling in each price range are relatively stable from month to month. However, in our current real estate market, this stability has gone haywire.

I’ll illustrate with an example:
Let’s create a make-believe real estate market. In this simplified market there are only two kinds of homes; Affordable homes which sell for $400,000 and expensive homes that sell for $800,000. Normally, in this make-believe market, there are 10 homes that sell each month, and five of these sell in the $400K range and five sell in the $800K range. This means the median sales price for homes in this market is $600,000.

Suddenly, the sub-prime mortgage crisis hits this market and as a result, nobody buys any of the $800,000 homes, but ten of the $400,000 homes do sell. As a result of this, the median price for the homes sold is now $400,000. The median price for homes in this make-believe market has statistically dropped by 66%, even though the homes that did sell, sold for the same price as they had the month before.

This is an example of how the statistics being reported for a market like Sonoma County can make things seem worse than they really are. This is not to say that home values in Sonoma County have not dropped, they certainly have, but the drop in value for a particular home may not be as dramatic as the reported drop in the median home price for the market.

Distressed Properties Drag the Market Statistics Down

A large part of what has fueled the recent drops in median home prices for our area are the large number of distressed properties (Short Sales and Foreclosures) selling in the market today. The quantity of these distressed properties are not spread evenly throughout the price range of homes in our market, but are much heavier in the lower end of the market. The resulting sale of these distressed properties hurts the prices of other homes in the same price range. Also because a much larger number of these lower-priced homes are selling and fewer of the higher-priced homes are selling, the median price for Sonoma County has dropped significantly.

For this reason, if you are considering the sale of your home, it is critically important not to rely on statistics about median home prices, or other “market-wide” indicators, but rather to have a professional Comparative Market Analysis done for your home and determine the best price for YOUR home in YOUR neighborhood.

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