Commentary: Don't Judge Housing Market By the Numbers

If residential real estate is weakening, why are prices for homes still showing gains? Economist Irwin Kellner weighs in on the paradox.
By: Dr. Irwin Kellner: The Wall Street Journal Online
If the housing market is weakening, why are home prices still rising?

To answer this question, let us return to those thrilling days of yesteryear, when we first learned math. It was then we discovered that figures may not lie, but liars do figure.

You see, there are averages and there are averages. And when it comes to home prices, you need to know how they are calculated before you can conclude what's happening to the price of the average home.

Knowing what's actually happening to home prices will help you determine if the price of the home you are selling or buying is right.

First of all, understand that average home prices that you may read about refer only to prices of those homes that were actually sold in a given month. They do not represent prices of all homes in the country.

Even more important - they are not the price of the same home measured from one month to the next. This is critical, for the way home prices are reported and analyzed, you'd think they were.

The most common average price is the median price. This is the midpoint of all prices recorded in a given month. As you might imagine, the location of this midpoint is determined by the range of prices recorded.

Thus, if more higher-priced homes are selling than lower-priced units, the median or geographic midpoint will move up accordingly. By the way, the same thing is true for another type of average - the mean.

Here's another thing to ponder: like new cars and trucks, many new homes have list prices. These are the prices that get recorded when the house is sold - even if the seller has to sweeten the deal by offering such amenities as upgraded appliances, furniture, carpeting and the like.

And there's a lot of this discounting going on, according to a March 4 article in the Wall Street Journal. Indeed, on the same day, the New York Times ran a story quoting the CEO of homebuilder Toll Brothers as saying that many houses in the Northeast, Florida and California are actually selling for 5% less than they did six months ago.

Another reason to question what is reported as average home prices is that new homes are getting bigger, so part of these higher prices simply reflect more materials and a bigger piece of land. The Census Bureau reports that the size of the average new home is now about 2400 square feet - a 15% increase since 1990.

Finally, logic would tell you that when interest rates rise, the more expensive homes, whose buyers are not as likely to be as affected by stiffer borrowing requirements as buyers of less expensive homes, will sell faster than lower-priced models.

So home prices are not defying the laws of gravity. They're only doing what comes naturally.