When analyzing a real estate market it’s essential to consider the correct metrics.
Recently, Western North Carolina television station WLOS reported in a brief segment that the average asking price for a Buncombe County home was $536,000. The median asking price for a home in our county is currently around $350,000. The $536,000 average list price that formed the basis of the news report claimed the markets were rapidly becoming unaffordable for many people. We believe that affordability is an important and ongoing issue for the region, and is likely to become more challenging as appreciation and higher interests rates occur. However, the market conditions described in the report were overstated for two reasons: one was the use of “asking price” and the second is the use of “averages” to describe the market.
Asking Price vs. Closed Sales Price
While “asking price” is one metric to consider when analyzing a real estate market, it only describes the seller’s perception, and doesn’t address actual, final sales prices. Ultimately, it is the meeting of the minds between the buyer and seller that establishes true market value. Most real estate professionals and home buyers would agree that sellers may initially perceive more value in their home than the market will bear. Thus, using “average asking price” to gauge home value trends leads to an inflated perspective of the market. It’s for this reason that analyzing CLOSED sales is much more telling when attempting to gain insight into home price trends.
Federal Housing Finance Agency’s Home Price Index (HPI)
One of the best tools for this task is the Federal Housing Finance Agency’s Home Price Index (HPI). The index measures average price changes in repeat sales or refinancings on the same properties, making it one of the industry’s most reliable sources for gauging home value trends. The HPI reported that the Asheville MSA gained 5.1% appreciation over the last 12 months. The index does lag one quarter, but its accuracy is well worth the wait. The 5.1% appreciation rate is far below the 13% increase in “average asking price” reported, and is consistent with historical trends.
Average Vs. Median
Since 2005, Beverly-Hanks has been monitoring the local real estate markets and producing a Market Report each quarter. The report dives deep into the region’s data and offers insight to real estate consumers on home values, sales pace and the quantity of inventory currently on the market. Over time we’ve found that average sales price can be a misleading metric on which to base insights. Although average is commonly used and well understood, median can be a better descriptor to describe the “middle” value in a set of data. While the average and median can be the same, they are frequently different when more of the data are clustered toward one end of the range or if extreme values are present in the data set. In these situations, median gives a better representation of central tendency than average. It’s for this reason that we track both average and median sales prices, but rely more heavily on median when offering insight on the direction of home values.
When examining the distribution of homes sales in Buncombe County, we learn that 75% of home sales occurred UNDER $300,000. The tendency of the Buncombe County sales data to cluster in the lower price brackets also brings into question the value of reporting on “averages” since a relative few high dollar sales will dramatically impact the average.
Predicting Home Price Trends
Real estate professionals often use a metric titled “Months of Inventory” to describe the relationship between the number of homes for sale and how quickly the available homes are selling. An industry rule of thumb exists that proposes markets with 0-6 months of inventory will experience prices increases, 6-12 months of inventory can indicate a balanced market between buyers and sellers, and markets with more than 12 months of inventory will see downward pressure on home values. In Buncombe County price brackets under $400,000 currently have less than six months of inventory, leading us to believe that unless additional homes come on the market, prices will increase. Price brackets between $400,000-$600,000 are in the 6-12 month inventory range suggesting a balanced market, and finally homes over $600,000 have between 26-65 months of inventory leading us to expect continued downward pressure in the higher-priced tiers.
A Thorough Real Estate Review Is Essential For Good Decision Making
While we believe affordability is an issue for the region, we also believe a thorough understanding of the real estate markets on a neighborhood level is essential for consumers to make informed and confident decisions. If you’d like to learn more about your neighborhood’s real estate conditions, we have three tools to help: