On Jan. 20, 2005, a headline in the San Francisco Chronicle stated that Bay Area home sales were down and that prices slid. If you, like many readers, scanned only the headlines, you might have thought home prices in the area had plummeted. Actually, they rose 14.3 percent between December 2004 and December 2005, according to DataQuick Information Systems.
Sensational headlines sell newspapers. Who wants to read about a real estate market that’s not as robust as it was a year ago–one in which home prices aren’t going up as fast as they were this time last year? Ho-hum news doesn’t do much for newspaper sales.
Behind the scenes of the Bay Area home sale market, the real story is not that home prices “slid” from one month to the next. It’s that the market is doing surprisingly well despite the negative press. In a nutshell, well-priced homes that are properly prepared for sale are selling for good prices and within a reasonable period of time.
While this is not the case in all markets, it certainly holds true for markets that are low on inventory. Recently, a home in a moderately priced neighborhood in Los Angeles sold with 10 offers. This miraculous event occurred in February of 2006, not February of 2005.
Areas that are flush to overflowing with unsold listings are a different story. These are areas that were overbuilt during the last five years. New home builders in these areas are offering concessions, like free landscaping and other upgrades, to encourage sales. Sellers of resale homes in over-built areas are forced to cut their prices in order to compete.
HOUSE HUNTING TIP: Regardless of where you live, there are two factors to keep in mind when evaluating news reports on current market conditions. One is that you need to evaluate what’s happening now in relationship to what came before. We’ve recently experienced several of the best years for home sales on record. If the market were to continue to escalate, we’d have a serious problem.
Already, we have affordability issues, given the recent rise in home prices. If home prices were to continue to rise unchecked, first-time buyers would eventually be shut out of the market. With no entry-level buyers, the move-up market would grind to a halt. Rather than a curse, the slow-down in the housing market is a blessing.
The other factor to keep in mind when you’re trying to make sense of changes in home prices is that, in most cases, the changes quoted in the press are changes in the median price of homes sold during a given period of time. The median is the market price for a given time period where half of the homes sold for more and half sold for less.
Changes in median price from one period to the next do not necessarily reflect changes in absolute home values. When the median price rises, it means that the number of more expensive homes sold during that period increased. Likewise, when the median price of homes sold declines, this means that the volume of lower priced homes sold increased relative to the number of more expensive properties.
Following the dot-com bust in 2000, the median home price in the San Francisco Bay Area dropped. This was due to the fact that the market for more expensive properties dried up. However, the market for properties priced under $1 million remained strong.
THE CLOSING: Before drawing conclusions about the strength of the home sale market in your area, you need to collect data at your local level. Regional, statewide and national statistics can be misleading.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers,” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.