YIKES! The Value of Your Home Dropped 44% Last Year!

According to ABC 7/KGO TV “Bay Area Home Prices Fall by 44%“. Wow. I mean, I know the market is down, but 44%? Really? In the last year? 44%?

They go on to explain:

DataQuick earlier reported that the median home price in the nine-county San Francisco Bay area fell nearly 44 percent, from $587,500 in December 2007 to $330,000 last month.

They did note that sales activity was also up sharply in December, up 18% from November and 48% from December 2007.

Now before you go out and mail your keys to the lender in lieu of the next mortgage payment, let me assure you that if you live in the Tri-Valley, your home has not dropped 44% since last December. What they are talking about is the Median Home Price. As discussed several times on this blog, the Median Home Price is a statistic that represents the mid-point of home sales prices (there are an equal number of home sales above and below this point). It is used to eliminate extreme sales (low or high) that would skew the Average Sales Price. The problem is that the Median Home Price represents.. well the median home price. It is not the same thing as Property Values. Statistically, if the market sees more activity on the lower end of the price scale, the Median Home Price will drop, perhaps markedly as in this case. While the Median Home Price can be useful in indicating major trends in the market when the sample size is large enough and the time period is long enough, it in and of itself is not a substitute for property values.

We have seen some large declines in the Median Home price in some areas through last year, and it will likely continue this year. The reason is that sales of lower priced homes are much more brisk than higher end homes. As a result, the percentage of sales of lower priced homes is much higher, and this drives down the Median Home Price. This is due to the surge in sales of foreclosure properties, most of which are in the low price neighborhoods, and the concurrent slow down in sales of higher priced homes. This is why we have seen both a strong increase in sales and a decline in the Median Home Price. And I am not suggesting that home values have not declined in the Tri-Valley the last year. We all know they have, just not by 44%, or anything close to 44% for that matter.

Real estate is a local business. It is dependant on many things, the most important being the dynamics of the market on a local level.

When taken as a whole, the Bay Area will include the outlying areas of Contra Costa County and Solano County, including markets that have seen substantial activity in foreclosure and distressed properties. But the situation is quite different in say Danville or Pleasanton. In these markets, there are significantly fewer bank owned and distressed sales, so the median home price in these cities has not been impacted to the extent of some of these other cities. Here is chart showing the Median Home Price in both Danville and Pleasanton over the last year.

As you can see, the median home price is down recently in both Danville and Pleasanton, but no where near 44%. In fact, the median home price in Pleasanton actually rose between November and December of last year, when there was a spurt of activity in the higher price ranges. This does not mean home values increased between November and December. In fact, there was downward pressure on home prices in Pleasanton during this period, even though the median home price rose.

So be careful about “Headlines”. The Media is in the business of selling newspapers and attracting readers. Consumers are much more inclined to read a story that says “Home Prices Fall by 44% in the Bay Area” versus a headline that says “The Median Home Price Falls, but Activity is Up and Some Markets are Much More Stable than Others”.