Average Prices
ByBy Doug Hutchins, Douglas County Real Estate
You have probably seen the news articles telling you about the large drop in the “average” single family home price in the metro Denver real estate market. Depending on the numbers viewed you might see quotes of “average” price drops from 10% to 15% compared to last year. But how accurate is the average? I believe you can easily argue that only a 2% drop in the “average” home price has occurred compared to the same period in 2007. Why the difference?
First we need to understand how the average is calculated. The average takes the total sales volume of single family homes and then divides that dollar amount by the number of homes sold. It is a simple calculation that provides a good indicator except when the product mix changes. Unfortunately, we have seen a substantial shift in the product mix that skews this average lower.
Increased foreclosures in smaller properties have resulted in smaller homes making up a larger percentage of the total homes sales in 2008 compared to 2007. In addition, the tight credit market for jumbo home loans has significantly slowed down the sales of large properties in 2008 compared to 2007. Quite simply stated, more smaller homes are selling and fewer larger homes are selling. This change in product mix would result in a drop in the “average” home price even if prices actually stayed flat.
A good example for comparison is a car dealership that sells only Kia and Lexus cars. During 2007 the dealership sold an equal number of Kia and Lexus cars. In 2008, the sales price for each car did not change, but the dealership sold twice as many Kia cars and half the number of Lexus cars compared to 2007. This change in product mix will drastically reduce the “average” sales price for the dealership even though the car prices did not change.
So what effect is the change in product mix having on the metro Denver single family home “average” price? To determine the effect, I examined all the sales in the Denver Metrolist system from January 1 through August 31 in 2007 and 2008. I did not include home sales in the mountains or in the area immediately surrounding Boulder that are typically included in the Metrolist sales. Based on this data, the average single family home price was $326,795 for the first eight months of 2007 compared to an average single family home price of $290,065 for the first eight months of 2008, a drop of 12.4%.
To adjust for the change in product mix, sales were broken down by square footage for each year then compared to determine the percent of sales in each square footage category each year. For example, homes between 1001 and 1500 square feet made up 26.4% of the home sales from January 1 to August 31, 2007, but in 2008 for the same period these homes made up 28.9% of the homes sold. Homes over 4001 square feet made up 4.1% of the homes sales from January 1 to August 31, 2007, but in 2008 for the same period these homes only made up 2.0% of the homes sold.
These might seem like minor differences, but when the same product mix for 2007 is applied to homes sold in the same period in 2008, the average home price for 2008 moves from $290,065 to $320,411, a drop of only 2.0% in the “average” home price. Breaking down the data even further shows an interesting change in pricing based upon square footage. Homes with less than 2000 square feet have seen the greatest drop in average home prices. Homes with more than 3000 square feet have seen a reasonable increase in average home prices. If you would like to see the full statistical breakdown, please email me below and I will send you the full report in a pdf file.
So what does all of this mean? It simply means that numbers on a large scale are not always “accurate” and do not necessarily reflect what is happening in your neighborhood. To obtain an accurate picture of home price movements, home prices must be examined at a neighborhood level. When you buy or sell a home, you need to be well informed and understand what is happening in the neighborhood in which you are purchasing or selling.
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