Why numbers do matter – but so does a good agent

In my new career as a Realtor I recently attended a class on using the data in the MLS (Multiple Listing Service). Two comments struck me. The first came from an agent of more than 20 years’ experience who said:  “I know my market; I don’t need data to tell me what a house is worth.”

The second came when the agents present were asked what they had been taught to say in response to the question: “how’s the market?” I was almost deafened as those present (this was a continuing education class) shouted out words like “great” and “terrific”. To which the instructor wryly commented that that was how Realtors got a bad name.

I am not setting out to criticize agents, individually or collectively. As a numbers wonk I am only too aware of the dangers of analysis paralysis – spending way too much time on data, rather than on sentiment and confidence and other huge factors in the home buying and selling decision process.

But let me ask you this question? Let’s say you have an investment in a Fidelity mutual fund and you read an interview with the manager who, when asked why he had made his largest investment, replied: “I had a feeling about the stock”. Really? With my money? Where’s the research?

Mutual fund companies employ research analysts; investment banks employ research analysts. All these individuals have at least an undergraduate degree and have passed the demanding Chartered Financial Analyst exams. Both sides do detailed analysis before decisions to buy or sell are taken.

Which is your bigger investment? Mutual funds? Or your house?

If you expect your mutual fund manager to go into detailed analysis before making an investment of your money, why should you be willing to do less – often far less – research before making the biggest financial investment of your life?

The real estate market has changed dramatically in recent years for one important reason: the internet. When most agents entered the business, they were the only people who had access to information about both properties available for sale and those that had sold. If you wanted to know what was going on, you had to talk to a real estate agent.

But all that has changed. Today, you, as a buyer or seller, provided you are willing to spend a little time, can find out almost as much information about recent transactions and also what is currently available (the competition if you are a seller) as most agents possess.

I say almost. You can certainly get the basic information, but what the agent will be able to tell you is what is happening right now: how many people are showing up at open houses, what the “buzz” is; and also specific features of houses either sold or available that may have affected their price. The agent is still a key part of the process.

All real estate firms, in response to the greater availability of information, produce their own statistics. Since most of these are taken from the MLS, they suffer from one big drawback: MLS uses for the most part average sales prices rather than median.

Why is this important?  The average of eleven numbers is simply the sum of those numbers divided by 11. The median is the number which has an equal number higher and lower – in this case the 6th number.

Before your eyes gloss over, let me give you two examples

In a test at school the students score 2, 4, 5, 7, 8, 10, 12, 13 and 83. The “average” score is 16, but 8 of the 9 students scored less than this number. The “median”, that which has an equal number higher and lower – in this case the 5th of 9 – is 8, which gives a much better idea of the mid-point of the scores.

Let’s look at those numbers in real estate. In 2012 in Marblehead the average sale price for SFHs (excluding distressed sales) was $665,000. Yet if you read my year-end review you will see that the median price was $510,000, almost 25% lower. Why is that? Because SFH sales took place between $205,000 and $4,100,000, a huge range. Using average prices, the $4.1 million house was worth 20 of the $205,000 house, yet only one sale at each price took place.

Does that change if we use a narrower price range? Let’s look at SFH sales between $500,000 and $550,000. Here the average price was $525,744, while the median was $521,000. The difference now is insignificant, less than 1%.

So, yes, within a narrow range there is not likely to be much difference between average and median prices, but when an overall market is looked at, or a wider price range, the differences can be material: median gives a better, but not perfect, picture.

One of the reasons median is not perfect is that a shift in activity at different price levels can cause a move in the median price which does not reflect what is happening to actual prices. Please take a minute or two to read my year reviews of both the SFH and condo markets in Marblehead to see how just this phenomenon occurred in Marblehead in 2012 – and using numbers I can demonstrate that it happened.

This is not an intellectual exercise. Please, read the reviews and you will see that the SFH market for properties under $500,000 in Marblehead underwent a significant change in late 2012. Notice that I said “market…under $500,000”. There is very rarely one market. Different locations, different price ranges have different characteristics. A year or so I wrote that the more I look at and study the Marblehead market, the more I am convinced that there are about 6,000 “markets” in Marblehead, that being the number of SFHs.

And that is really what makes real estate the most fascinating and attractive investment. If 30 analysts follow GE their earnings estimates, using extensive models, are all going to be in a narrow range. But in real estate, two houses close to each other with similar characteristics can have widely ranging values, depending on a whole host of other factors, many of which are not known until one enters the house – and until a survey has been performed.

A question I have been asked is what I am trying to achieve with my articles. The answer is: an informed population of buyers and sellers. To that end, all my articles are available to everybody, including real estate agents of other firms, appraisers, lenders, etc.  Why? Because I believe it is in the interests of everybody that we have an informed market.

In conclusion let me say this: real estate agents today have access to more and more detailed market analysis. But so do you, the buyer or seller. Should you not take advantage of that before you make a decision about your biggest asset?

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