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Price increase in the climate of declining sales and rising inventory? Something doesn’t add up. The report does provide some clue: “Although the median price of a home in California continues to rise, this reflects the fall-off in sales in the lower-priced markets of the state…” The phenomenon mentioned in the last sentence is noteworthy and the gain in the “medina price” reported for the state, as well as in some counties, masks the reality of broad-based price declines if one wanted to know what is happening to the price of the same home compared to last year or the past two years. When it comes to any economic data series it is very important to keep in mind as to what is being measured and how. If ever there was truth in the adage – The Devil Is In the Details – what is happening to the home prices in California is a good substantiation of that. When things don’t add up it pays to look carefully. And I have. I will endeavor to show that there are three factors that result in overstatement of the median price of resale homes because the characteristics of the median priced home are not the same as the median priced home sold a year, or two years, ago: 1. The size of the homes being sold recently is larger compared to those sold last year. 2. The area mixture of the homes sold recently is significantly different from those of the year ago whether we look within the state or within the counties where the median price shows YoY gains. The rapidly increasing gap between the Haves and Have-nots in the US shows up very clearly in the latest California home sales data. 3. The modernization (or home improvements in layman’s term) of the homes sold recently is significantly greater than that of year, or two years, ago. I plan to support the first two with the hard data and for #3 one can rely on media reports and anecdotal evidence that suggest that sellers are making lot more improvements in order to sell homes today even in areas where sales are strong, e.g., Palo Alto, because the sellers want to increase their chances in a slow sales environment. Let us begin with a cursory, under-the-hood, look at the prices in various counties as shown in Table 1.
As much as there is lot of red ink in Table 1 it does not tell the true story of the real price declines because it does not tell you what were the characteristics of the median-priced homes sold this year versus the median-priced homes sold last year in any of the counties. I will try to show that the price decline might be understated by 10-15% if one were to keep the characteristics constant, i.e., apples-to-apples comparison! It is abundantly clear from the above table that YoY price gains, as well as new price peaks, are concentrated in LA County and four of the SF Bay Area counties, where a higher percentage of state’s Haves (top 5% income households) live (shown in gold). What is happening in Santa Clara County, a proxy for Silicon Valley, tells the story of all the areas with YoY price gains very well and I happen to keep detailed data for the county so I will make my case by providing these details.
The figure above tells a very different story of Santa Clara County housing than the one told by YoY price gain in the median price of homes sold as well as new all-time high in the price reported for April 2007. The serious decline in the listing price shown above is consistent with the steady rise in inventory for the past two years if one keeps seasonality in mind. Believe it or not the median price of the Active Listings (excluding Pending Sales) hit a multi-year low of $750,000 on the morning of 05/26/07. The high of $898,000 was reached during March 2006. For the past two years we have roughly 150% increase in inventory and 40% decline is sales. So, why is the reported median price showing YoY gain? Table 2 below provides an immediate clue.
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