Precision Without Accuracy | Why Housing Statistics can be Just Plain Wrong
March 13th, 2009 categories: Market Conditions
The news loves to quote housing statistics just about everyday. It seems the housing market is the ultimate Doom and Gloom story that just keeps going. I think it is important to understand that while those numbers may be precise in most respects, homeowners should know they are not necessarily accurate. Crazy you say? I’ll be happy to explain why, using our local northwest Arkansas market statistics as an example that I am sure works across most of the country.
A Tale of Two Markets
What most people don’t realize is that our current housing market is actually two separate markets. A standard home market and a foreclosure market. Sales statistics (mine included) don’t differentiate between the two. Frankly, even for a numbers savvy Realtor, the data is just too difficult to split up. Fortunately for buyers and sellers, buyers do differentiate between the two and have a preference when buying a home.
Think of it this way. Homes in foreclosure have issues….encumbrances, liens, maintenance, repairs…you never really know what you are getting with a foreclosure. For buyers, it’s risk vs. reward. A foreclosure is much more risky so they are going to pay less for it.
The opposite is true for standard non-foreclosure homes. Buyers expect them to have a clear title, they expect them to be clean and well maintained. As such, they expect the price of a non foreclosure home to be higher than one that is bank-owned or in the foreclosure process.
So, we have two dissimilar markets that are really diametrically opposed in buyers eyes. Who determines price? Buyers…100% of the time.
Lumping all the sales statistics of two different markets into one is the cause of the precise but inaccurate numbers we see reported.
Take it from the numbers
Two homes sit in a standard subdivision. Both are for sale. One is a foreclosure where the homeowner fell upon hard times, worked some shady deals, got in over his head, and had to let the house go. The other one is a successful homeowner who is simply moving out of state for a new job opportunity.
Without getting into how the foreclosure effects home values in the subdivision, most people would pay more for the non-foreclosure home than the distressed home, right? How much more?
Well in Northwest Arkansas in February, the average home sale price was $137,521 which comes out to about $75 per square foot. The average listing price for homes in the same period was $232,352 or $110 per square foot. Now stay with me. The average list prices of those homes that SOLD in February was only $144,159.
That’s quite a difference between the average list price of homes that are currently on the market and the average list price of homes that SOLD on the market. About $88,193.
So what does that mean for home prices?
It means that more foreclosures are selling than standard non-foreclosed homes. It means investors and savvy home buyers are out in force raking up the foreclosure inventory. It means that people interested in buying standard homes are waiting in the wings and not buying standard inventory while foreclosures are prevalent. Above all, it means that standard home prices have not fallen as much as reported by the indexes, Realtors, media, and government because no one is separating the two markets.
Do the price of foreclosures and the large numbers of them on the market affect standard home prices?
Of course.
Are standard homes worth the average of foreclosure prices and standard non-foreclosure homes?
Absolutely not. They are worth more for the simple fact that they are not foreclosures. But statistics have to go off of home SALES prices…not listing prices…skewing the numbers down.
So what’s my home worth today and is it worth trying to sell it?
As a standard home owner you are fighting a couple of battles.
The first is the battle of perception. Many people believe that because of market conditions, it’s a bad time to buy a house. While that could not be further from the truth, it does affect peoples’ decisions.
The second is the battle of funding in the mortgage industry and all that is going on there. Those buyers that used to be perfectly qualified in 2005 are now either very hard to get funded or totally out of the running to buy a home. In the long run, it is good that these buyers cannot buy anymore…that’s part of the reason we have the market we do.
If you want to know what your home is worth you have to get a local real estate agent involved. They are the only ones that can determine what your home would likely sell for in this market. Please don’t try to make up some formula from something you saw off television or something someone came up with on the internet. Don’t go off your neighbor’s home that sold last year or even six months ago. Ask a qualified real estate expert to give you a home market analysis to determine what your home would likely sell for and in what time frame.
It your home worth trying to sell right now? Sure it is…if you want to sell it. Yes, it will probably take longer than it would have taken a few years ago. Yes, you may sell it for a little less than you wanted to sell if for but homes aren’t banks and I feel people shouldn’t be using them as money repositories or guaranteed investments. Along those lines though, if you are a speculator and you want to consider buying foreclosed properties…now is the time to do it with high inventories and cheap money, you won’t find a better time in the first half of this century.
