Lies, Damn Lies, and Statistics!!

By
Education & Training

Did you know that 47.2% of all statistics are made up on the spot?  So with that in mind, proceed with caution, you have been duly warned!

Constantine Isslamow wrote a post titled Average Prices, not a true measurement which made me think about average prices and some of the other interesting statistics that I have learned aren't always what they seem to be.

Humorous graph by xkcdAs a former engineer I'm pretty big on statistics, and I use them frequently.  Look at my website, or talk to my clients and you'll quickly learn that I like numbers.  However, one thing I've found is that you have to interpret the statistics you see or read about very carefully.  As the cartoon implies, numbers can often be manipulated to say whatever the speaker/author intends.  With that in mind, here's some things to keep in mind when someone throws out a number.

Average Sale Price

The difficulty with this number is, on a small scale like comparing homes in a subdivision, that it doesn't take into account the size of the homes, and larger homes sell for more than smaller homes, all else being equal.  There's another problem when applying this statistic to compare, for example, last years average sales price compared to this years average price.  If, for example, there were a number of $1M+ homes that sold last year, and none sold this year, the average of all homes is likely to go down.  However, the value of lower priced or mid range homes may be stable, or even increasing.  Don't assume that because the average in your city went from $250,000 to $245,000 that your home lost $5,000 in value. It may have, but it just might have gained value.

Average SP per Sq Ft

In order to avoid some of the above problems I like to use Average Sale Price per Square Foot.  This is a pretty good mechanism to compare properties within a subdivision, but it isn't foolproof either.  The value of a finished basements or attic is not as great as the value of first and second floor finished space.  So, a 2800 square foot home where the finished space is on two levels is worth more than a 2800 square foot home with a finished attic.  If they are priced at the same SP/Sq Ft then the second is overpriced.  If the second home is priced right, taking into account the somewhat lesser value of the finished attic, then it will have a lower Avg SP/Sq Ft, making it look like more of a deal than it really is.

Average List Price

One of the interesting things about the Triangle area of North Carolina is that houses are generally priced right, and we have a average SP/LP ratio of 97%.  You read that right.  For the approximately 2000 closings we have had in Cary over the last year, we have an average SP/LP ratio of 97%.  This means that it is IMPERATIVE for sellers to price their house right, or it simply won't sell.  Buyers need to realize that the sellers will get very close to their asking price, assuming it isn't overpriced.  This isn't an area where offers that are 20% below list are going to get much traction.

So, if you are interested in what homes are selling for in your neighborhood, or in a neighborhood you are interested in buying in, give me a call and we can discuss what the market is REALLY saying!

 

Posted by

                                                                                                                                                                       

Ken Gramley
Fonville Morisey Realty
1149 Kildaire Farm Rd
Cary, NC 27511

(919) 414-1961
www.KenGramley.com
ken@kengramley.com

Try the most innovative subdivision search around!

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Tony Marriott 12/20/2010 09:46 AM
  2. Gabe Sanders 12/27/2010 08:10 AM
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Show All Comments
Rainmaker
558,659
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Ken -- So true, and even psf can be a mine field.  Ranches cost more to build then popping an extra level up, so their psf tends to be higher, functional obsolescence, design, corner versus interior lot, and a host of other factors can greatly skew the #s, let alone trend lines, a given seller's motivation, etc.  It takes a very astute agent to really know a market.

Dec 18, 2010 11:59 PM #10
Rainer
35,678
Ken Gramley
Cary, NC

Constantine, thanks for stopping by. Here's to a successful 2011 for all of us!

Irene, I totally agree.  We always have to look at what helps our clients the most.

Larry, Exit polling showed 67% disagreed, but then 72% hit the "like" button, so I'm not sure what to think.

Rob, I believe medians are better to use than averages, but unfortunately it's not a stat that our MLS system always gives us.

Cory, thanks for reading!

Christine, thanks!

Kerry, as I mentioned to Rob our MLS doesn't always provide Medians.  It does if the sample is small enough, but on searches with large results it won't give us a median. I also provide the numbers over time as well, which helps show how well a subdivision is doing (or not doing).

Dec 19, 2010 12:02 AM #11
Rainer
35,678
Ken Gramley
Cary, NC

Chris, all good points, which is why it is so important to have a good agent to help interpret the stats on any given home/neighborhood/city.

Dec 19, 2010 12:04 AM #12
Rainmaker
826,659
Marc Swartz
Toronto, ON
CPA, CA - Toronto, Durham & York Regions, Ontario

Hi Ken - I love your graphic in the post.

It is extremely easy to prepare statistics to support all types of positions.  You often need to understand statistics and in many cases you need to read between the lines.

Dec 19, 2010 12:18 AM #13
Rainmaker
892,763
Michael Setunsky
Michael's Commercial LLC - Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Ken, the interesting thing about statistics is you can make them turn out any way you want. Comparing apples with oranges never works. Good Post!

Dec 19, 2010 10:45 AM #14
Ambassador
683,723
Charita Cadenhead
Keller Williams Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Ken being that you are an engineer by trade and playing the numbers game is like hopscotch to children, I'd be very inclined to put stock in your statistics.  Congrats on the feature.

Dec 19, 2010 12:06 PM #15
Rainmaker
439,098
E.J. "Mike" Carlier
CENTURY 21 MarketLink Realty - Lakeville, MN
Lakeville MN

Statistics distort and confuse.  Find average price per foot above ground, below ground, attic etc., and you have still failed to quantify two of the main factors in a home's value.  How does one go about quantifying average condition of sold homes?  How about average specific location?

Dec 19, 2010 12:17 PM #16
Rainer
18,498
John Hopkins
Nakoni Appraisal - Renton, WA

Ken,

I had to laugh at your blog, your are right statistics can be misleading.  The stat you touted as most accurate in you market is the least accurate in mine.  With the NWMLS SP/LP ratio is based on the last list price not the first and totally ignores relistings.  So if a house originally lists for $500K, then drops the price to $450K, relists for $400K , drops to $350K, then again relists at $300K and then sells for $290K the LP/SP ratio would be 97%.  Not the actual of 58%. 

Dec 19, 2010 02:35 PM #17
Rainmaker
187,626
Lyn Sims and the Blog Dog
Bartlett IL Real Estate & Homes - RE/MAX Suburban - Bartlett, IL

Good post on those darn numbers. Good to show sellers that overpricing by 10% to have a little 'lee way' is not a good idea.  We never use the $ per square foot in our area & it's often times blank in our MLS - makes them (MLS stat guys) absolutely crazy where I guess in CA it's always put in.  Go figure.

I get sales figures once a month for our area from the owner of our company & it's totally amazing on what 'he sees' and what I see.  9 times out of 10, I'm scratching my head saying what's he smoking?

Dec 19, 2010 04:44 PM #18
Ambassador
672,151
Karen Crowson
Alain Pinel Realtors, Pleasanton, CA - Livermore, CA
Livermore Wine Country Homes

Yep, stats can be friend or foe.  Too many times, there's a story behind the story and without context.  When comparing median price in a particular month, it would indicate that the city I live in has a higher median price that the neighborhing town.   Yes, if all you looked at was a single month snapshot, where a large vineyard parcel with a single family home sold for a large sum of money, not at all representative of the 'norm' for the area. 

Dec 19, 2010 07:03 PM #19
Rainer
218,982
Bill Pohl
Tetra Homes, Inc. - Loveland, OH

Ken - When I had my accounting practice, we always use to say "Numbers don't lie, Liars use numbers!!"

Dec 19, 2010 07:43 PM #20
Rainmaker
1,511,817
John Novak
Keller Williams Realty The Marketplace - Las Vegas, NV
Henderson, Las Vegas and Summerlin Real Estate

Very good insights, Ken. The right context is what really gives statistics their meaning.

Dec 19, 2010 07:47 PM #21
Ambassador
1,237,972
Erica Ramus
Erica Ramus - Ramus Realty Group - Pottsville, PA - Pottsville, PA
MRE, Schuylkill County PA Real Estate
I love numbers too! I run the area numbers monthly and love putting spreadsheets together.
Dec 19, 2010 08:04 PM #22
Rainmaker
234,232
Mark Montross
Catamount Realty Group - Burlington, VT
Listing and Buyer Specialist

Ken - very good points. I just had a discussion about this with a seller who read an article about the average home price increasing in our area.

Dec 19, 2010 09:06 PM #23
Rainer
35,678
Ken Gramley
Cary, NC

Marc, glad you liked the xkcd.com cartoon!

Michael, thanks for reading.

Charita, thanks for your confidence!

Mike,  while I don't necessarily think they "distort and confuse", they absolutely can NOT be used in a vacuum without other information.  However, I believe, with that other information they can be informative and helpful.

John, our SP/LP ratio is also based on most recent list price.  In theory we have the same issue.  However, if the average SP/LP is 97% it implies that a house probably isn't going to sell until it's priced properly, or the average would be lower.  It does NOT mean that it's safe to put in an offer on a home that's 97% of list, because that specific home may be overpriced.  It's more of a tool to use with listings to convince them to price accordingly.

Lyn, glad to see you get it, but careful what you smoke! :)

Karen, exactly my point.  We have to provide the context for our clients.

Bill.  Uh-oh.  I use a lot of numbers....   Thanks for reading!

John, thanks for reading.

Erica, glad to see more numbers folks around!

Mark, hope it worked out well with that seller!

Dec 19, 2010 11:52 PM #24
Rainmaker
910,668
Tony Marriott
Haven Express @ Keller Williams Arizona Realty - Scottsdale, AZ
Associate Broker, REALTOR

This is a great blog post about truth in numbers.  I'm amazed by the number of short sale agents who have closed hundreds of short sales with a 95% closing ratio whose MLS track record is far, far from it.  If you're going to use numbers, do so honestly and accurately.

Dec 20, 2010 09:46 AM #25
Rainer
35,678
Ken Gramley
Cary, NC

Tony and Suzanne, I agree completely!  Thanks for stopping by!

Dec 20, 2010 03:07 PM #26
Rainmaker
556,661
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Ken-I like the quantitative approach in building a case for a course of action. It helps with most clients, but some just believe what they believe to be true and don't want to be confused with facts.

Dec 23, 2010 09:24 PM #27
Rainer
35,678
Ken Gramley
Cary, NC

Wayne, I've also found that some people just aren't interested in the details.  Just give them the results and they are happy.  Thanks for coming by!

Dec 25, 2010 06:40 PM #28
Rainmaker
1,828,251
Gabe Sanders
the BlueWater Realty team specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Ken, I post statistics from my board regularly, but they need interpretation.  Like you say, they can easily be misinterpreted.

Dec 27, 2010 08:08 AM #29
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