A Few Thoughts Regarding Real Estate Statistics
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“There are three kinds of lies: lies, damned lies and statistics.”
- Benjamin Disraeli
Real estate statistics are among the most misused, misquoted and misunderstood "facts" we are bombarded with. The only honest purpose for market statistics is to provide reasonably unbiased information for those trying to make decisions regarding the purchase, sale or ongoing ownership of real estate -- typically one of the largest financial investments of one's life. The problem is that most market analysis is provided by those who want to convince you to do something; those addicted to either unrelenting optimism or constantly impending doom; or those not qualified to interpret the data. Whether delivered by real estate agents, market "pundits", reporters, bloggers, websites, special algorithms or the guy who lives next door, all these situations lead to improper use of statistics.
Rule 1: Statistics without informed context are worthless. One can make virtually any case – positive or negative – by cherry picking a single statistic derived from a particular data set and a specific period of time, whether that be the median sales price, foreclosure sales or the latest Case-Shiller Index. Small data set statistics can swing wildly without any significance. Computerized algorithms (Case-Shiller, Zillow) are not as flawless as they are presented to be. The overall national trend may misrepresent California’s, the state trend may misrepresent the Bay Area’s, the Bay Area's may misrepresent the city’s. Within San Francisco itself, distinct neighborhood markets often move in different directions at varying speeds.
One needs to know a specific market inside out, first to carefully vet the data for statistical flaws, outliers or anomalies, and then, standing back to look at the larger picture, to be able to intelligently interpret what it appears to signify.
Rule 2: Average and median statistics are generalities. They often fluctuate up and down from one month to the next even in stable markets and price statistics are often affected by other factors besides changes in value, such as seasonality, available inventory, financing conditions, buyer profile and changes in the distressed-property or luxury home market segments. In San Francisco, every month sees a relatively small number of relatively unique properties sell. The city features an astounding variety of real estate and unusual sales can easily distort general statistics, especially in limited areas. To value a specific property, an analysis crafted to its exact location, condition, circumstances and amenities, is required.
Rule 3: Any definitive trend will be reflected over the longer term and in more than a single statistic, i.e. not just median price, but also dollar per square foot, months supply of inventory, percentage of listings accepting offers, days on market, and so on. Even then, it can be difficult to read the tea leaves of exactly what is happening or starting to happen on the street. Especially since closed sales data is typically 4 to 8 weeks behind the time offers are actually negotiated.
Rule 4: No one knows the future. A recent study showed that the confident predictions of financial market pundits are wrong more than 50% of the time. You would actually do better flipping a coin: Think of the years of pundit projections prior to the 2008 financial and real estate markets meltdown.
At Paragon, we are not immune to the failings that afflict other commentators, but we try our best to provide straightforward information regarding market conditions, with as much detail and context as possible, so that you can make your own informed decisions. 99% of our focus is on San Francisco and we don’t believe anyone performs the amount of analysis we do regarding the city’s real estate. None of our charts are created automatically by computer: all the data is personally investigated and vetted for anomalies before being charted. When we do make tentative predictions of future trends, it is based upon what appears to us to be overwhelming supply-and-demand conditions and decades of experience in SF real estate. (But please see Rule 4.)
The links to the upper left will take you to a wide range of analyses, which we try to keep updated. Please don’t hesitate to contact me if you have any questions or comments, or would like to receive our regular market newsletter.
Patrick Carlisle, Chief Market Analyst, Paragon Real Estate Group