## Wednesday, January 30, 2008

### Real Estate Statistics in the Media 2

There's an old saying in statistics: "torture the numbers long enough and they'll tell you whatever you want to hear." One of my pet peeves is when statistics are thrown around in the media without any reference points, framing, or explanation – they're virtually meaningless. Yet almost everybody I come in contact with wants to talk about a particular number they heard or read recently.

Let's take a look at some of the tricks statistics can play.

In Lesson 1 we looked at Median Home Prices.

Lesson 2

Average Home Prices

Average, also called the Mean, is a statistical term which tells us the result of adding all the numbers together and dividing by the number of numbers. (huh?)

1. \$150,000

2. \$175,000

3. \$200,000

4. \$250,000

5. \$300,000

In the list above, we know the median is \$200,000. But the Average is \$215,000. (150k + 175k + 200k + 250k + 300k) / 5

So how can the average be misleading, or misunderstood, without additional reference information? Let's look at another example.

Suppose you hear on the news that the average home price has dropped from \$332,000 to \$310,000 since last year. What does that mean?

Let's assume these are the sales from last year, which were used to compute the \$332,000 average (the same list produced a median of \$275,000 in Lesson 1):

1. \$195,000

2. \$220,000

3. \$250,000

4. \$270,000

5. \$275,000

6. \$350,000

7. \$425,000

8. \$450,000

9. \$550,000

Do we know any more now than we did before about the drop to \$310,000? Not really.

Now let's look at 3 different possible scenarios which all produce an average of \$310,000.

 All Prices Drop Top Heavy Bottom Heavy \$190,000 \$190,000 \$179,000 \$215,000 \$215,000 \$188,000 \$240,000 \$240,000 \$199,000 \$245,000 \$245,000 \$199,000 \$250,000 \$250,000 \$250,000 \$340,000 \$255,000 \$350,000 \$395,000 \$260,000 \$425,000 \$415,000 \$275,000 \$450,000 \$500,000 \$860,000 \$550,000

So what happened this year? All 3 scenarios have an average of \$310,000, and all 3 scenarios have a median of \$250,000. How can they be so different? Did prices drop in a uniform fashion across the board? Did the prices drop more severely across the board, but with one luxury home sale lifting the average? Or did prices not change at all on the higher end, but the bottom fell out for the entry-level homes?

That's why, when you hear a quote about Average Home Prices on MSNBC, KFNN, AZCentral.com, or the evening news, you need to ask yourself what that really means. Chances are you won't get the whole story surrounding that statistic – the numbers just don't sound as exciting with all the boring details to support them!

That's also why, whenever I do a market analysis, I try to explain what the numbers mean, rather than merely quoting some numbers for you to wonder about on your own.

I hope this helps you understand a little bit more about the term Average Home Prices.