One of the primary benchmarks real estate analysts use to evaluate a particular market is the median home price.
Often the current median home price will be compared to a period in the past – compared against the prior month, quarter, year, etc. This is an extremely valuable tool to determine the health and direction of the market. But beware, the benchmark of median home price is often misunderstood.
First let’s understand what is meant by median. Median is defined as the middle number in a sorted list of numbers. For example, if there were 41 homes to sell, you order the sales according to sales price - least to most. The home that is 21st on the list is the median home price. There are 20 homes to sell at a lower price, and 20 homes to sell at a higher price. If there is an even number of total sales, the middle two numbers are averaged to get the median. Got it? Great. The median is used in real estate to hedge against wide variations in purchase price that may skew the average (aka ‘mean.’) This is particularly important in Lake Tahoe where during one month we may have one $12M lakefront sale amongst 20 other sales $350K – $1M. The $12M sale would push the average sale to an inflated value, not showing the true market characteristics.
The median price is used to show a better middle ground for the overall market. Now it is true that the median home price in Lake Tahoe, like most areas in the US, has seen a precipitous decline in recent years. But does that mean a homeowner in Tahoe has seen their property depreciate at the same rate as the median home price decline? Does this mean the overall market has depreciated at the same rate as the median home price? No to both questions.
The reason is three fold. First, what has happened in Tahoe has happened in many areas. Because of a weaker economy, an uncertain future, and a difficult lending environment (to name a few of our recent problems) buyers have gravitated to lower price points. Buyers comfortable in a $1.5M price point, may elect to purchase a property for $800K, even though they can afford something more expensive. $800K is their new comfort zone even though they have the cash on hand, income and creditworthiness to buy at $1.5M. This results in an overall lower median price. Second, much of the distressed inventory, bank-owned properties, and short sales are to be found in lower price points. Because there is perceived value in these distressed sales, there is a lot of activity in this segment of the market, translating to large sales volume at low price points and an overall lower median price in the market. The low-price distressed sales is also the segment of the market where we are seeing the greatest investor activity, a huge player in today’s market. Investor activity contributes to high-volume, low price point transactions translating to a lower median price overall. Third, there are micro markets in Lake Tahoe, as with most regions.
No surprise, some segments of the Tahoe market have performed better than others. The Martis Camp community is one example of an area of strength in the market. This suggests one can not apply the median home decline across the board. Because there is a greater volume of sales in lower price points, the median home has declined in our area. While median price is a useful tool to help guide an analysis of the real estate market, it does not directly translate to an overall depreciation of the market to that level.
Bill Dietz | Principal Broker | Tahoe Luxury Properties, Inc