When Is a 20% Drop in Average Prices Really a 0% Drop in Average Prices?

Here is a post from Tim in Atlanta that makes the point of my previous post much clearer. Thanks for clarifying the issue!

Via Tim Maitski "Video Agent Guy" (HomeAtlanta.com):

Market stats can be deceiving.

Every month the MLS in Atlanta comes out with average home sales prices for the Atlanta metro area. They are useful in general terms but let me show you how easy it is to get an entirely incorrect picture of what's going on in the Atlanta market.

Fulton county is in the middle of metro Atlanta and is a very long county. It could take you one hour to drive from the south side to the north side. Houses in the north part of the county might cost on average $500,000 while houses in the south part of the county might cost on average $200,000.

Here's a hypothetical situation with simple numbers to make the math easier.

10 sales at $500,000
10 sales at $200,000
= ave. price of $350,000

Next year the prices stay the same, total number of transactions stay the same, but the relative number of transactions changes in the two areas.

5 sales at $500,000
15 sales at $200,000
= ave. price of $275,000

The MLS would report that the average price of a home in Fulton county dropped 21.4%, from $350,000 to $275,000 and total sales remained constant at 20.

That would be an amazing number that would be reported in the newspaper. If you are an agent you might recommend that a seller reduce their price, when in fact the only thing that has happened is that more homes sold in south Fulton than north Fulton.

I've spent many hours this week creating market reports that drill down to smaller market areas around Atlanta. I've created average house price charts for specific areas going back to 2002 which show both price and volume. I will start posting them in the next few days.

It has been really eye opening. There are sections around Atlanta that have had average prices drop around 50% in the past year while other areas have remained level. In general, the volume of transactions in the decreasing markets is increasing and the volume in the steady markets is declining significantly. This explains why so many agents are hurting all over. Prices in north Fulton are staying even but there are half as many homes selling. In south Fulton, prices have plummeted and the number of transactions has increased. This will skew the area wide numbers in a similar fashion as my simple example.

The bottom line is real estate is local. Use national numbers with caution and also metro wide numbers with caution. Know the big picture but also know what's happening in your very local area.