That Big Drop in Median Housing Prices

Or, why one has to be careful with statistics. James Hamilton provides some nifty information on why that big drop isn’t nearly as bad as it first looked. If you look at all the regions (Northeast, South, Midwest, and West) and the change in housing prices you’ll see something rather…well shocking. In each region the median price of housing increased. Yes, you read that right, they all increased? And here is the table that Prof. Hamilton constructed showing this (and which I’m shamelessly stealing):

2005:Q3
median price

2006:Q3
median price

percent
change

% of 2005:Q3
total

% of 2006:Q3
total

US

236,400

232,300

-1.7

100

100

Northeast

318,700

380,300

19.3

6

6

Midwest

202,700

210,900

4.0

16

14

South

190,000

191,400

0.7

49

55

West

344,300

349,700

1.6

29

25

So how did they get the decline for the U.S. as a whole? Well it is due to the number of houses that are sold in each of the region. The number of homes in the South sold declined by less than the decline in the West. What does that have to do with anything? Well as Prof. Hamiltion points out,

Thus homes in the South represented 49% of the 2005:Q3 sample and 55% of the 2006:Q3 sample. Because the median home in the South costs just a little over half as much as the median home in the West, any shift in the fraction of recorded home sales that are coming from the South would translate into a reduction in the U.S. national median sales price, even if the price of every single home in America had gone up.

So what does that “biggest decline in 35 years” mean for the economy? Well, it isn’t nearly as bad as the headlines make it out to be. Granted, Prof. Hamilton is being a bit facetious when he says that the price of every single home in America has gone up, but in looking at the disaggregated data, things look much, much less worse.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. M1EK says:

    The first thing that happens as prices are about to (or just beginning) to fall is that stubborn buyers refuse to drop prices as quickly as necessary to keep the rate of sales up.

    This data implies to me that the price drop is already on the way, and certainly doesn’t fail the common sense test when it indicates a much bigger drop on the West Coast than in the Southeast (where, absent the three big metro areas south of Jacksonville, there was no bubble).