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Op-Ed: Meaningless Medians


Anomalous home prices don't reflect much - except egos.

Minyan Michael Gat once suffered at the hands of spiking median home prices.

Back in the 1990s, I was one of the many victims of the home price anomaly; in retrospect, it's easy enough to explain:

First, the market for the smallest apartments -- like a 90-square foot Manhattan studios, for example -- dries up, so that those homes become impossible to sell. As the cheapest segment of the market evaporates, the median necessarily inches higher.

Once the market for one-bedrooms dries up (as indeed it did), the median gets pushed up even more.

At the apogee of this trend, only very wealthy cash buyers are putting money down, such that the "median" is only measuring a tiny number of transactions at the highest end of the market.

In a non-liquid market like real estate, the median can fail to capture the "market clearing" price for units that remain unsold - since it only takes the prices of purchased homes into account.

As in any other market, the trick is to check on volumes. Rising "median prices" with declining volumes are a bad sign, and this can go on for as long as two years after volumes start to slow down. Conversely, the median price usually continues declining for quite some time even after volumes pick up, because more lower-end properties are being sold.

I'm now seeing the same trend in my neighborhood in Los Angeles. The "official" numbers are up more than 20% year-over-year. But in reality, transactions have dried up completely: Dozens of homes within a few blocks of mine have been on the market for months. Whatever homes have sold are showcase properties on the high end of the spectrum.

Which indicates that Hollywood scenesters with cash to burn are still buying homes that reflect the size of their egos - as are top hedge fund managers and other big-time players in New York.
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