How often have we heard about statistics that lie? More often, they are misinterpreted, leading to inappropriate conclusions. One that is most often misinterpreted is median home value. How many times have we seen a press report on San Diego County median home value?
How often have we heard about statistics that lie? More often, they are misinterpreted, leading to inappropriate conclusions. One that is most often misinterpreted is median home value. How many times have we seen a press report on San Diego County median home value? Our analysis of La Jolla (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for the 92037 zip codes) uncovers the weakness of the median home value statistic.
For this analysis, we segmented La Jolla real estate into 3 groups by original listing price: 1) Properties less than $1 million; 2) Properties greater than or equal to $1 million and less than $2 million; and 3) Properties greater than or equal to $2 million. For each group, we compared the first 7 months of 2007 to the first 7 months of 2008, an equivalent year-over-year period comparison. As usual, when comparing the performance of the individual groups or sub-markets, noticeable differences are discerned (Chart B). However, most striking is comparing the total median property value for La Jolla to the three individual groups.
As we can see from Chart B, the total median property value is -25.2%. Taken on face value, it appears as though La Jolla property values depreciated dramatically since last year. However, if we look at the median property value for each of the three groups that we analyzed, the conclusion is much different. How can La Jolla, as a whole, decline by 25.2% when one group actually went up in value and the other two groups fell by only 9.6% and 7.3%? The answer rests within how a median statistic is actually created.
The formal definition of median is the middle number in a given sequence of numbers, taken as the average of the two middle numbers when the sequence has an even number of numbers: 4 is the median of 1, 3, 4, 8, 9; and 5 is the median of 1, 3, 4, 6, 8, 9. Therefore, median is essentially the middle number when the numbers are lined up from smallest to largest: simply line the numbers in a row, count the total number of numbers, then find the one halfway in the middle if the total number of numbers is odd or take the average between the two middle numbers, if the total is even.
The danger with using this ever popular statistic in real estate is when the population it is measuring is actually composed of different sub-populations (or sub-markets), especially when comparing a change in median value over time. With our La Jolla example, we found that there was a 25.2% decline between the 2007 total median sold price and the 2008 total median sold price. However, when we look at the change in the number of sold properties for each of the three groups, we see that the low group or properties with an original listing price less than $1 million sold more properties in 2008 than 2007. Accentuating matters, the two higher priced groups did the opposite and sold less in 2008 than 2007, specifically -40.6% and -31.6%.
The end result was that the low group contributed more low-end numbers to the 2008 median sold value and the two higher groups contributed fewer high-end numbers to that same 2008 median sold value. The 2008 median sold value got skewed downward, not because properties values have declined by 25.2% but because the different price groups that contributed to that median sold price did not contribute in the same proportion in 2008 as they did in 2007. Property value change was more in the single digits and not necessarily negative for all price groups. Worst yet, this is only one example for a single zip code using 3 broad sub-markets within that zip code. Imagine how erroneous San Diego County median statistics are next time your read the newspaper or watch the news. Don’t underestimate your realtor when she or he starts talking about comparables.
Unlike La Jolla which had its strength in the lower end of the market, Solana Beach/Encinitas real estate (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for 92075 and 92024 zip codes, respectively) has it in its upper end. When comparing the first 7 months of 2007 to the first 7 months of 2008, there appears to be relatively unequal states of supply/demand equilibrium between the upper end and the lower end of the market.
For this analysis, we segmented Solana Beach/Encinitas real estate into 3 groups by original listing price: 1) Properties less than $750,000; 2) Properties greater than or equal to $750,000 and less than $1.5 million; and 3) Properties greater than or equal to $1.5 million. Generally, we only saw a slight drop in supply or the average daily number of properties available for sale, but a larger, disproportionate drop in demand the number of properties sold (Chart D). However, when we compare properties with an original listing price greater than $1.5M to those below, very different supply/demand ratios emerge.
The high-end of the market or properties with an original listing price greater than or equal to $1.5M experienced stronger demand while simultaneously reducing its relative inventory more than both groups below it. Both property groups with original listing prices below $1.5M sold over 20% fewer properties in 2008 than the same period of 2007. Not only did the demand for these two groups drop significantly more than the upper end, their inventory or supply fell less than the upper end.
However, to be fair, the middle price group, properties with an original listing price greater than or equal to $750,000 and less than $1.5 million, experienced the smallest decline in median sold price, yet the difference was nominal. The more important point is which price segment exhibits healthier or more stable supply/demand equilibriums. While overall the Solana Beach/Encinitas area appears to have weathered the last 12 months exceptionally well, currently it looks like properties with an original listing price less than $1.5M are in excess supply given historical demand levels. Consequently, of any of the price groups, these lower two appear most vulnerable to downward price pressure going forward.
When reviewing the data that we put together for La Jolla, Solana Beach, and Encinitas, it is important to remember that these areas are comprised of sub-populations, some behaving much differently than others. For example, properties that are on the beach can behave differently than other areas. Likewise, detached properties can behave differently than attached properties. What we have presented here is a partial sub-population analysis. A complete analysis would identify the subpopulation of a property then assess that particular subpopulation’s behavior. In next month’s edition, we’ll examine Coronado and Downtown San Diego.
Written by Linda and Tom Sansone
Willis Allen Real Estate
Phone (858) 775-6356