Lies, Damn Lies, and Median House Prices

A commenter named "Unsympathetic" makes a good point in my blog entry on Berkeley vs Oakland house prices. Yes, median Berkeley house prices are rising. But it’s entirely possible for that to happen even if every single house in Berkeley is falling in value.

Berkeley, like any city, is made up of a range of housing, from the low-end to the very high-end. Now let’s suppose that the top end of the housing market is suffering: houses which were worth $1.5 million a year or two ago are worth $1.2 million today. But let’s also suppose that the kind of people who could afford a $1.5 million house a year or two ago can afford a $1.2 million house today. They’re wealthy, they can always raise the money somehow. And the sellers are wealthy enough to be able to take the loss, if they need to. So the top end of the market has fallen, but at least it’s still active.

Meanwhile, at the bottom end of the market, there’s very little activity at all. The houses which used to sell for $300,000 to people brandishing subprime mortgages now can’t sell at all, because no one’s offering those mortgages any more. People who are upside-down on their mortgages can’t afford to sell because they’d lose money they don’t have. And a lot of houses are sitting on the market at unrealistic prices, simply not selling at all: buyers have neither the ability nor the inclination to pay those prices, but sellers can’t afford to drop them any further.

What happens to median house prices in such a scenario? They go up. The prices of high-end houses are going down, but high-end houses now constitute a much higher percentage of total real-estate transactions than they did in the past. And so the median house price rises. As does the mean house price, for that matter: there’s no easy way of solving this problem. All you can do is take a careful look at sales volumes in different segments of the market: if the decline in sales below say $500,000 is much larger than the decline in sales above $500,000, then you know to take any median house-price statistic with a large grain of salt.

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