Beware of “Average” Home Prices or Appreciation Rates

September 22, 2015

Westcoe Realtors, Riverside California…It really doesn’t matter where you turn…internet, TV, newspaper…there is always some source that is ready to tell you about the “averages” for home prices or appreciation rates for your area.  We live in a micro-wave society, where we want simple answers right now…even when they are misleading.

Allow us to explain…at least when it comes to real estate.

 

Let’s start with the average price of a home in our area…Riverside.

 

When a source digests whatever statistics they explore to come up with an average price for a home in our city, it doesn’t matter what number they end up with…it will be wrong.

 

As an example, we have areas of our city where the homes run in the $300,000 range, and we have areas of our city where they run in the $800,000 range.  How in the world are you supposed to average these two areas?  Oh yeah…you could add them together and then divide by 2, and come up with an average of $550,000, but then you would now have 3 numbers that don’t make any sense.

 

So…first rule of averages for a city…it depends on where you are looking in said city.

 

The smaller the geographic area, the more accurate the “average”.  The problem with the media however is that they need a wide area for their articles.  Reporting on a small neighborhood is not as attractive to them as quoting and “average” for a larger city.  Hence, you get a misleading number the larger the area.

 

Think of trying to find the average home price for the combined areas of Riverside and Orange Counties.  There is no way that an average home price for this area would make any sense in the real world

When it comes to home appreciation “averages”, not only must you narrow your geographic area as noted above, but you must factor in the price range you are discussing.

 

In the real world of real estate, homes in the lower price ranges appreciate at a higher rate than homes of a higher price range.  Why?  Simple…there are more buyers able to purchase at the lower range than the higher.  Hence, more sales, more competition, more bidding, and therefore quicker price rises.

 

However, never yet have we seen any sort of qualifier when the media says that homes appreciated a certain percent depending on their price range.

 

Any local Realtor worth their lockbox key understands how this works…so when a potential client wants to know the average appreciation rate on a home, the Realtor must know the approximate neighborhood of the inquiry to ascertain the approximate price range…and then they can quote a figure that will be far more accurate than just taking some rate for the entire city.

 

So what is the moral of this story?

 

It would be that the next time you are hearing about the average price of a home (or the average appreciation rate) in your city, take it with a very large grain of sand.  These types of numbers might make for good cocktail conversation, but when it comes to getting real, you need to narrow the field down far more than the media information.

 

Or put it this way…the average weight of a horse jockey (approximately 125 lbs) and an NFL offensive lineman (approximately 300 lbs), when combined, is 212.5 pounds.  Do you want want this “212.5 ” pound person either riding your horse, or blocking for your favorite football team?

 

Averages…good copy, but poor predictors if not narrowed down.

 

As always, thanks for reading our blog, and let us know if there is anything you would like to see discuss in this space.

 

 

 

 

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