I realized that for months I’ve used the term Median Price and assumed that readers knew what it meant.  In light of recent reports and comments, a further explanation is necessary.

First, the technical explanation.  Median is to a mathematical term describing a midpoint. When applied to prices, the median is the price at which there are an equal number of prices above and below. Using median prices for reporting sales on O`ahu eliminates the effect of very high-priced homes by making expensive sales just another point above the median.

Now let’s talk logic.  The median price accurately portrays what’s being paid for real estate, but doesn’t tell you anything about individual properties. As an extreme example, let’s assume every O`ahu property sold in a month was on the Leeward coast, where values are lower.  If the next month, sales shifted to the east side, the median price would be higher, even with no change in individual property values, since these properties are more expensive. The opposite would also be true, that is, more west sales and fewer east sales lower the O`ahu median.

The conclusion is that the median price is of limited use for estimating the value of an individual property, so what good is it?  It is actually a measuring stick of the pocketbook of buyers, and by that, I mean, it tells you what buyers are spending. It lets you know what prices are being paid, but nothing about what is being purchased. If all properties were exactly the same, the median would be a true measure of value but, since this isn’t the case, other factors like size, location, view, property features, etc., also come into play.

Can the median price be increasing when valuations are decreasing? YES. Can values be increasing (or decreasing) and the median price is staying the same? YES.

So what’s happening to MY property?  The answer is found by looking at comparables, not overall medians. A comparable is any property similar to yours that, with adjustments, can be used to determine the value of your property. An example would be the sale of a duplicate of your house, in the same location, but it has an extra bathroom.  A proper estimate of the value of your property would be this known sale price, but deducting the estimated value of the extra bathroom.

This process is exactly what a professional REALTOR® or, more formally, an appraiser uses to estimate a value for a particular property and they do not use published median prices.

This entry was posted on Tuesday, July 8th, 2008 at 11:41 am and is filed under Island Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.