The meaning of the median

Rich Toscano over at Piggington.com and The Voice of San Diego had this chart up the other day comparing San Diego median home prices as reported by Sandicor (the regional MLS) to the Case-Shiller Home Price Index through the month of May April.


Recall that the Case-Shiller Index is like a super-OFHEO home price index where only repeat sales of the same home are included and the difference in price between sales is used to calculate a year-over-year rate of change. The OFHEO index includes only loans serviced by Fannie Mae and Freddie Mac whereas the Case-Shiller Index includes all single-family home sales.

The problem with the median price, as reported in the LA Times here a short time ago, is that the relative strength of the upper end of the market versus the lower end of the market has pushed the median price higher than it would otherwise be. Since the median price is simply the price at which half of the homes sold are more expensive and the other half are less expensive, fewer sales of cheaper homes moves the median higher, all else being equal.

The chart below from the LA Times demonstrates the recent change in sales volume by price range in dramatic fashion for all of Southern California.


Rich writes:

The divergence between the median home price and the Case-Shiller Home Price Index continues.

According to the HPI, which compares same-home sales and is thus a far better price metric than the median sales price, San Diego home prices were still declining as of April.

If Professors Shiller and Case are to be believed, San Diego single family home prices have dropped 6.7 percent since April 2006 and 7.1 percent since the November 2005 peak.

You can look at charts for all of the individual markets that the Case-Shiller Index covers over at Macro Markets. Here's the chart for San Diego showing about a seven percent decline since the peak in 2005.


Remember that the cost of the massive wave of home improvements over the last few years is not factored into either index.

The Case-Shiller Index attempts to account for major remodeling, but according to the index methodology document, your run-of-the-mill kitchen and bath upgrades costing tens of thousands of dollars are not taken into account when calculating the index.

Admittedly, it would be difficult to accurately represent this in a home price index, but neither should it just be ignored when trying to understand what is happening to home prices.