Friday, September 11, 2009

Is it Price or Percentage that Matters Most?

I commented on yesterday's thread that I think the dollar drop is more important than the percentage drop, since real people deal with real dollars and not percentages. This theory is primarily based on my observations of the housing tracker data which tracks three different price points, the 25th percentile, the 50th (median), and the 75th.

Below is an excerpt from the data which illustrates my point. While the percentage difference at the three price points, varies greatly, from -54% to -34%, the actual drop in value is much closer. Important to note also, that the 75th percentile has dropped almost 20k more in dollar terms, even though the percentage makes the total drop seem small compared to the 25th percentile.

I thought it might be worth reposting an update to yesterday's post in case folks don't follow old material.

Update: I calculated the weighted median price (for the June 2009 data) and it comes out to be $211,628. The weighted median per sq foot is $125....this implies a median home size of 1,687 square feet. Which given 3x income, is affordable to a household making $70,550 a year. (Statistical can't just average all the zip codes, you have to weight the data by the number of sales in each zip code to get an accurate picture.)


Giacomo said...

Interesting. I have to wonder if the residents occupying more expensive houses simply have more financial cushion, and so have remained more stubborn on price than the lower-tier folks.

Which can still change.

Giacomo said...

But... the percentage IS more important. Losing 100K hurts a bit more if you make 70K a year than if you make 200K. The 100K hurts a bit more if you paid 300K for the house than if you paid 700K.

No, the interesting thing about your chart is the disparity between the tiers (the lower tier having given back most or all of their "bubble" equity, the upper tier still clinging to much of theirs). Comparing the actual dollar value drops is just an oblique way of looking at the same phenomenon, not a more meaningful one.

radiophilejapan said...

Interesting viewpoint. I wonder if the same happened on the way up. My gut feeling is that the expensive houses have not appreciated as much as the affordable ones percentage wise.

RV6Flyer said...

"My gut feeling is that the expensive houses have not appreciated as much as the affordable ones percentage wise."

I somewhat agree with you, radiophile.

95819, the Zip with both the least % decline and $ decline.

95819 in 2000 was still relatively expensive back then. Speaking with neighbors, their feeling was houses did not increase with the same ferocity during the boom as more speculative markets, ie oak park or elk grove.

Some unquantifiable portion of the absolute dollar increase in 95819 came from improving older homes and pouring large amounts of capital into them. If you track a home's value--one with zero improvements or additional sq added--for the last 10 years, you will see there was much less relative price appreciation and much less depreciation from the peak.

I think the same can be said for many other zip codes. There will most likely be variations in the data due to product mix as well. Loomis and Granite Bay were once small towns with small older homes. Suddenly gigantic villas grew out of the rocky soil and the median went through the roof, now high end sales are very slow and the median has fallen through the floor. This makes it very difficult to draw significant conclusions, but I will say the three rules of real estate do hold true.

I also wish there was a way to correlate equity % with price increases and decreases. My gut says high leverage = big price increases and big decreases, while zips with lots of equity have much more stable price action.

RV6Flyer said...
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husmanen said...

Sacramento and San Diego have had some similarities in percent price increases/decreases in the past.

Rich Toscano over at VoiceofSanDiego and originator of Piggington’s blog had an article not too long ago about the price differentials for different ‘tiers’.

As a percent, at least for San Diego, the Low Priced Tier had a much higher percent increase (350%) from 97/98 (last bottom) than the High-Priced Tier, approximately 200% for the same time period.

Here is the blog conversation regarding the article.

Paul said...

My guess (I agree with Radio) ... The upper end didn't see the appreciation that the lower end saw, and is thus, not seeing the same level of decline. There will always be more buyers and competition to buy the bottom 25%, than the top 25%. But I also think that in the near term future, the upper 25% will see more downside pressure than the lower 25% (which appears to have found a bottom with a lot of buyers).