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Friday, February 12, 2010

Changing Sales Mix Blurs Housing Price Changes

2010 Housing Market:
More Toyotas (er, Chevy's), fewer BMW's

Confused by the cacophony of statistics purporting to describe today's housing market?

The root of the problem is that the statistics are really capturing two things: 1) the change in housing prices; and 2) the changing mix of homes that are being sold.

(The exception to the foregoing is the Case-Shiller index, which purports to isolate factor #1, changing prices, by only looking at "matched" sales pairs -- that is, the same house. However, Case-Shiller is susceptible to other weaknesses, at least in my opinion.)

Chevy's vs. BMW's

To illustrate the problem, imagine if auto sales were measured the same way as home sales.

In a recession, people buy more, uh . . . Chevy's; in good times, more BMW's and Lexuses.

That doesn't mean auto prices fall dramatically in a recession -- it means that economy cars are more popular.

Similarly, when bank-owned foreclosures dominate the housing market -- like in 2009 -- the "average" and "median" home selling prices fall, too.

That doesn't necessarily mean that home prices have dropped dramatically.

Rather, it means that smaller, less expensive homes are . . . smaller and less expensive.

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