Uncovering The Truth Behind Real Estate Statistics
Three statisticians went hunting. They came across a deer in a clearing. The first one fired and missed 3 feet to the left. The second one fired and missed 3 feet to the right. The third statistician jumped in the air, and yelled: "We got him!"
(I know, it's a mean joke. 😂)
We live in a data-driven world, and most of us have come to rely on a steady diet of quantitative metrics in order to understand whatever corner of life we're interested in. Unfortunately, there is a pervasive belief that "numbers don't lie," when in fact numbers lie all the time, or at least the people providing those numbers do, sometimes unwittingly, sometimes not.
Real estate, by far the largest sector of the US economy, is awash with statistical reporting. Every article, newsreel, and sound bite feeds us snippets of statistics, from which we're supposed to derive a comprehensive understanding of what's going on in the market and forecast the future. All too often though, these market stats are misused, misquoted, misunderstood, and provided by people ill-suited or unqualified to interpret the data. There are various culprits:
There are those that want to convince you to do something for their own financial motives. "There's never been a better time to buy or sell!" (Realtors are often accused of, and sometimes guilty of this.)
Some people are fiercely attached to one position or another. Always a bull or always a bear, some people believe the market never goes down, and others that the bubble is always about to burst. They will twist the data to support their case.
The media lives on dramatic headlines. News cycles and the public's collective memory are short, so twisting a piece of data or taking it out of context to create a headline is commonplace.
Computer-generated analytics - a good idea in theory, but often garbage because nobody is vetting it for methodology, sample size, mix, anomalies, etc. Sites like Zillow and others turn out a ton of this crap.
Good or bad, statistics are never precise metrics, but merely indicators of broader trends. While good quantitative data is critically important, the market is really just made up of people and driven by human behavior. So for true insight into the market trends and dynamics, you have to marry the data with a deep, qualitative understanding gained by immersing yourself in day-to-day interactions with the players. It's that qualitative data, or "feel", that gives context and meaning to the quantitative data.
Common Data Misinterpretation
Let's look at some of the most common real estate measurements that too often are nothing more than meaningless junk.
Median Sales Price
The median sales price is the standard metric in real estate. But median price often fluctuates due to factors completely unrelated to actual changes in fair market value. Sometimes it's for no reason at all other than a different batch of homes were sold. This is especially true of the smaller, more expensive markets, which we have a lot of in the Bay Area.
Exacerbating this further, the most often quoted statistics are month-to-month and year-on-year changes in monthly median sales price. But these stats often fluctuate without any real meaning.
The chart below for Atherton, CA perfectly illustrates this point. A small, high-priced market with relatively few sales and a large spread in price points, median prices vacillate wildly from month to month, due mostly to a changing mix of sales prices each month. Knowing that January's median price was up 75% and February's down 25% tells us nothing about the overall health of the market.
Granted, Atherton is a tiny market, but these metrics don't improve much as we expand the geography. Looking at any single year-on-year change in monthly median price for all of San Mateo County we still see a similar lack of insight. While real estate markets can and do change quickly, cycles are relatively long, and looking at month-on-month metrics tell us nothing about longer-term trends.
I addressed this issue previously in the article It's All About Inventory. The media loves headlining the lack of inventory story. Left unsaid, however, is that we are seeing the highest volume of new listings coming to market since 2005. The problem (depending on your perspective) is that demand has spiked more, meaning that all these new listings are being sold at the fastest rate in the past 30 years. So at any given point in time, "active" inventory for sale is low. (Much like the great toilet paper shortage of 2020; production levels were stable, we just couldn't keep the product on the shelves.)
Realtors love to talk about how much over asking price they sold their listings, and the media eats it up. What they won't tell you is that many homes are being priced significantly under market value, virtually guaranteeing a massive sales to list price ratio. Good strategic pricing will elicit competition and overbidding, but the market is mostly rational. So when you see 20%, 30%, 50% over bids, you have to wonder about the veracity of the original list price.
Discerning Meaningful Trends
To discern meaningful trends we have to examine a wide range of supply and demand statistics and external factors over a longer time frame, always keeping in mind that NO ONE can reliably and consistently predict the future with any accuracy.
For price trends, we generally want to look at 3-month rolling periods at a minimum, sometimes 6- or even 12-month rolling for smaller markets.
Always consider the geography encompassed by the statistics. It's perfectly reasonable to look at national, regional, local, even neighborhood statistics. They all have value and purpose. But make sure you know what it is you're looking at, and if you're looking at multiple sources or time periods make sure it's apples to apples.
The housing mix is often ignored, but single-family homes, condos, and townhomes can and do behave very differently across time and local markets. The more those housing types are mixed together in the data the less relevant the results. For example, most Bay Area condo markets have rebounded this year, but overall appreciation rates have been basically flat.
Price segmentation also plays a factor, since the market forces and trends can vary quite a bit across price points. While there is no question that housing values have increased significantly this year, there has been a huge increase in sales and home prices in the luxury market, typically considered to be homes above $3M.
Finally, keep in mind that the data are all lagging indicators, so qualitative information is paramount to better understanding. In mid-June, I sensed the peninsula market was slowing somewhat, but there was no pricing or sales volume data to reflect that.
Every day I speak with potential buyers and sellers, contractors, tradespeople, stagers, mortgage lenders, appraisers, inspectors, and of course other Realtors. Hearing about their workload and projected pipelines are the only data that reliably predict the future, and I'm talking a short-term future at that. Sure, I also look at broad economic, political, and demographic data, but I'm no economist, and even the most celebrated economists in the world have a terrible track record predicting the future.
How You Should Look At Real Estate
There is no question that the myriad data being thrown at us every day can be confusing, and consequently rather useless. For anybody thinking of investing in a home in the Bay Area one approach, if done correctly, is simply to ignore the data.
Historically speaking, Bay Area homeownership has been a good, even spectacular investment, as long as you don't have to sell in a down market (which does happen here!) The safest way to buy is to:
Buy with a longer time horizon. I generally recommend at least a 5-year intention.
Buy at a cost you can afford now. (Of course, affordability is a very personal assessment.)
Use long-term, fixed-rate financing. I haven't always recommended this, but in today's market, it's the only thing that really makes sense.
Keep an adequate financial reserve for emergencies.
Don't tap your home equity for anything other than a rational investment. (Home improvement - good; New boat or trip around the world - bad.)
The future holds no guarantees, but if you keep to these guidelines you will most likely come out ahead.