Real estate pricing

The

median home price is one of the most common measurements mistakenly used to compare real estate prices in different markets, areas, and periods. It is said to be less biased than the mean (average) price since it is not as heavily influenced by small number of very highly priced homes. However, this is not true. Actually, it is more biased than the mean because it is more easily influenced by abnormalities in the market, such as an extraordinary influx of say, low-selling foreclosure sales prevalent in an economic downturn. ( The statement made up to this point by the previous author is completely false, by statistical definition "the mean is affected by each and every value, which is an advantage. The mean uses all the data and each data item influences the mean. It is also a DISADVANTAGE because extremely large or small values can cause the mean to be pulled to the extreme value" (Business Statistics for Contemporary Decision Making, 5th edition, Black K. p 51). In other words in the authors attempted example....all those lower price houses are actually affecting the mean (average price) MORE than they would affect the Median. "The Median is unaffected by the magnitude of extreme scores" Business Statistics for Contemporary Decision Making, 5th edition, Black K. p 49). all the data and each data item influences the mean. The mean is unbiased ONLY when extreme outliers in the data are not present, the median is not influenced by extreme values. The term "outlier" is a statistical term dictating how relevant say a home price is to the other prices in the set of prices, there are specific tests for this but the best example perhaps would be the following. Nine homes all sell for prices in the range of say 100-140,000 dollars but one home sells for 225,000. This number would be considered an "outlier" to the rest of the data (example is too complicated to write here) but the point is that the number is substantially different than the sales prices of the other homes. In the authors example the mean would be substantially MORE influenced by the "influx of low sales price of homes than the Median would. One way to determine what to sell your home for would be to look at the numbers that composed the average, are they relatively similar-within 5-10% of each other or are they significantly far apart 15% or greater. If the prices look like they are all over the board than take each price and write them in order from the smallest to the largest price. The number that is in the middle of that list you just made would be the Median. If you have a list of numbers with an even number of prices in it (say 8 different prices) the median is found by adding the 4th and 5th prices together and then dividing that result by 2. In the case of any list if there is an even number of prices you add the two middle terms and divide by two. Should you use the Median or the Mean? Well the answer in todays market is tricky. The next item to look at is "days on the market". So perhaps a home in your area sold for a nice price but was on the market for 5 months (150 days). Do you (can you) afford to wait that long? If so, do not be afraid to keep your realtor in check by telling him/her what price you want to sell at remember they work for you. You should also follow up to be certain your home is listed and they are not ignoring the listing because they do not want to put in the work at that price. A good realtor will work hard at every price and let you be wrong for perhaps 21 days. At which point the good realtor will show you their efforts vs results and you will probably reason with them to drop your price a few percent. Do not be afraid to use a median price if the sales prices are really scattered and the Median price is actually higher than the Mean. Any realtor who fights statistically factual information when your answer is a higher selling price than theirs is doing you a disservice and just doesn't want to wait to get paid. Nobody wants to wait forever to get a check but you have a right to sell your home at a price that is relative to your situation-not your realtors. Generally speaking the mean is an OK measurement but it's useless when you only use the standard "few comparables" that is generally used. In todays market especially, if you want to know the REAL price to sell your home for than use the mean of perhaps ten of the most recent sales and than ask your realtor to perform a "t-test at the 95% confidence interval to determine the high and low range values. (Watch your realtor's eyes roll back in his/her head when you present this idea). This answer to this test is saying that, there is a 95% chance that the mean sales price is between the upper and lower values. If you strictly use the mean you have a 50% chance of being correct....it's your money, would you rather be 50% right or 95% right? Any basic statistics book such as "Business Statistics for contemporary Decision making, 5th Edition, Black, K., p 310) or engineering friend will be able to show you how to do this calculation. But let's remember Real Estate is a license and these individuals are good at presentation, centralizing a place where buyers and sellers can meet, and working the process. They are not however necessarily adept at statistics. Continue on for more entertainment in this article. Common Realtor arguments for establishing a low sales price include: "I've been doing this for ex years...blah blah blah" " I know this market better than anyone" Translate this and similar phrases into the following: " I really don't wanna work hard and so I wanna set your house price at the lowest level possible so we can unload it and I can move on" They may refute that statement saying they get paid more if the house sells for more but when you consider a slow moving real estate market. A house selling at $275,000 would net one realtors firm 3% or $8,250. That same house selling at $310,000 would net the realtor (at 3%) $9,300. BUT if they had to wait 90 days to get that extra 1,050 they won't do it. The real question is can you yourself afford to wait 90 days for an extra $35,000. That's about 11,000 per month in your pocket-not bad change. So listening to a lazy realtor can cost you some serious cash. Now on the the humorous AND obvious attempt of a dim-witted realtor's attempt at explaining statistics This is due to the tiny sampling size of just 1 (or at best) 2 sales that the median sale represents. The median introduces an unacceptable level of Sampling error. The mean, though not perfect, is superior to the median because it at least eliminates sampling error by utilizing all of the available sales. Rents and prices are often expressed per square foot to act as a basis of comparison. Home prices are limited by various factors, such as the incomes of potential buyers, the cost and ability to construct new property to increase supply, and demand for rental units. Since eighty percent of all homes purchased are purchased with a mortgage,[citation needed] the ability to make payments, borrow money, and the cost of borrowing money are major influences limiting how far prices can rise before hitting resistance due to prices hitting levels where potential are unable to qualify.[who?] In general the ratio in the US are home values at 2-4 times annual income levels.[citation needed]