Two days ago I wrote about how State or Nationwide sales stats may differ significantly from those of the Bay Area, so pay attention to the region being reported on. Today I’m cautioning you about trusting macro local real estate stats. I often hear stats thrown around that appear to reflect unrealistic shifts in the market without an analysis of the data to understand what the numbers really mean. Most of the time that these dramatic shifts occur, what really happened was a change in the quality of the properties being sold on a particular month and not a change in property values.

San Mateo County Ave. Single Family Home Sales Price
Red Arrow refers to April-May 2018 time frame

A great example of this just occurred in 2018. Consider how prices spiked (red arrow above) and dropped again later in 2018. Was the market going crazy? Were home prices really fluctuating that much? The answer is no!

The table below has the reported average monthly sales prices for single family homes in San Mateo County.

MonthAve. Sales Price% Change
January 2018 $1,725,500
May 2018 $2,148,000 Jan. – May = +25%
August 2018 $1,893,528 May – Aug. = -12%

So according to the stats home prices rose 25% from January to May and then collapsed 12% from May to Aug. There were a couple things wrong with this price appreciation calculation for 2018. To start, January almost always has lower average sales prices than the previous months because January’s numbers reflect sales that occurred in December. People with larger more expensive homes typically do not sell in December. Therefore December’s home sales typically include less expensive homes and this results in lower average sales prices. Looking at the graph above, you almost always see a sharp drop in prices in the December-January time frame.

The table below has the average size for single family homes sold in a given month in San Mateo County.

MonthAve. Sold Home Size Ave. Lot Size
Jan. 2018 1,876 SqFt 9,461 SqFt
May 2018 2,091 SqFt 9,979 SqFt

The table above shows that the homes sold in May on average possessed about 215 SqFt more living space and 518 SqFt more yard than those sold in January. With home prices set around $1,000/Sqft of living space, this size difference explains away about $215,000 of the price different between January and May without concluding that home prices actually increased.

So there is seasonal pattern to home sales. The year starts off with sales of smaller homes and then larger and more luxurious homes enter the market and get sold. As this occurs, the average sales price up gets skewed up. So, as the real estate market heats up in Spring and Summer, rising home prices are also the result of a greater mix of luxury properties being sold and not solely an increase in home prices overall. There is typically a ratio of ‘luxury’ homes sold to ‘average’ homes each season. However, sometimes the homes sold on a given month fall outside the ‘normal’ mix and then average sale prices for that month spike or drop. This makes sense because the high end luxury market does often behave differently than the ‘normal’ real estate market.

In the table below we see that the top three home sold in January add up to about $26.15m, but then it rises to $60.2m in May and drops down to $33.7m in August. Part of the average home spike in May was caused by an extraordinary number of luxury homes being sold; May was a month that fell outside the ‘normal’ mix.

San Mateo County Single Family Home Stats

2018 JanuaryMay August
Ave. Sales Price $1,725,500 $2,147,980 $1,893,528
Home Ave SqFt 1,876 SqFt2,0911,913
Ave Home Price $/Sqft $929$1,025 $1,001
Top 3 Home Sales $13.8m,

Further evidence that the market did not collapse 12% from May to August is seen in the price per Sqft. values. The average price-per-square-foot was $1,025 in May 2018 and dropped down to $1,001 by August; this is only a 2.3% price decrease on a per SqFt basis compared to the 12% price drop for the average sale price. The homes sold in August were on average 8.5% smaller than those sold in May so their prices had to reflect that.

If we remove the top three sales in May from the data, then May and August look more similar with both month’s top three sales adding up to approximately $34m. Without May’s top three sales in the mix, the data reflects a fairly flat market. The price-per-square-foot then becomes $998 in May; very comparable to $1,001/SqFt in August. Without the top three sales in May, then the average home is approximately 117 SqFt larger and sold for about $131,000 more than in August. This makes perfect sense; slightly larger homes, slightly higher average sales price.

Stats with Top 3 Sales from May 2018 Removed

2018 May August
Ave. Sales Price $2,025,000 $1,893,528
Home Ave SqFt 2,030 1,913
Home Ave $/Sqft $998 $1,001
Top 3 Home Sales $11.8m, $11.4m, $11m $14.7m, $11m, $8m

So from digging into the data, we concluded that what seems to be 25% price increase followed by a 12% decline in local real estate values was actually mostly just a changing mix in the quality and size of the homes being sold.

This may not be important to you in your everyday life, but it could have an impact on you if you’re looking to buy or sell a home. A reported spike in average home values might make a buyer feel like they need to offer more money to successfully purchase a house and a seller might reject good offers believing that they were not good enough due to the faulty stats they heard.

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