This morning, the S&P Case/Shiller Home Price Index, which measures prices in 20 US metropolitan regions, registered an 18.1% decline in prices. And for as bad as this sounds, its actually the best reading in 6 months. According to Bloomberg, one of the index’s designers, Yale economist Robert Shiller said he saw “striking improvement in the rate of decline” in April.

No metro area experienced year-over-year gains, but declines from the previous month eased for the 3rd month in a row. Las Vegas is still in horrible shape, tallying a 32% year-over-year tumble, along with Phoenix where prices have fallen more than 35% from last year. Phoenix is down more than 50% since the peak in June 2006.

As high end markets continue to tumble while low end markets grope for a bottom, it will be interesting to see if the Case/Shiller Index — which is a value-weighted measurement, ie, it weighs higher value homes more than low value ones — diverges from median home price data reported by the National Association of Realtors.

For more on how to dissect average price data, please read Straight Up Statistics – Deconstructing the Average.

By AUSTIN NELSON

In today’s fast paced, data-driven world, it’s easy to get lost in the morass of statistics flashing across our TVs and computer screens at a sometimes maddening pace.

Government officials, bankers, retailers and snake oil salesmen alike throw out statistical arguments at the drop of a hat, telling you why their pitch is the only one worth listening to because they have the data to back it up. But before accepting what you hear or read at face value just because some nameless research institute did a study, stop for a minute to ponder the complexities of even the most seemingly innocuous of statistics: The average.

Let’s first assume some particular data being quoted were reliably gathered and analyzed (This is almost never a safe assumption, but that’s a topic for another day), then examine how the average and another so-called “descriptive statistic” –- the median — are used in the data reports we see every day.

While on the surface it may seem that these two statistical measures could be interchangeable (indeed they are often used interchangeably with no explanation), they tell us very different things about the data they describe.

The median of a given group of data is its middle value. For instance, if your dataset has five data points and you lined them all up from smallest to largest, the third value would be your median. On the other hand, the average, or mean, of a dataset is determined by summing all values and dividing by the number of data points.

For example, suppose you are looking at real estate sales in a certain area within a certain time frame and you had the following 5 values: $300,000, $320,000, $320,000, $450,000, and $1,200,000. The median of this set is $320,000 (the middle value). The average is $518,000 (2,590,000 / 5). As you can see, even in this simple example, the two descriptive statistics are significantly different.

Real estate sales are often represented by the median value. The reasons for this are varied, but center around the fact that a few sales at extremely high levels (like that $2 million house on the top of the hill) can easily skew the average of a dataset towards those properties, even though most homes in the area are selling at lower prices.

For example, in Temecula, CA where most homes sell at modest levels (by California standards) but some homes sell for significantly more, the average sale price in 2008 was about $435,000. The median price, on the other hand, was around $359,000. That’s is a difference of over 20%.

Contrast that with areas where home prices are more homogenous, like Daly City, CA, where the average and median values are more closely in line. In 2008, the average sale price for Daly City was around $562,000 while the median was about $558,000 – a much smaller spread (<1%).

So which is better? Average or median? As can be seen from the examples above, neither.

Both display different aspects of the same set of data points. In Temecula, where median and average wildly diverge, using the average skews the data towards a much higher level. An individual from out of state looking to buy there might incorrectly assume they couldn’t afford to do so. On the other hand, solely looking at the median leaves out the fact that there are million dollar plus estates in Temecula available to buyers looking for that sort of thing.

When the National Association of Realtors releases their monthly sales statistics — which is the real estate pricing data carried by most major news outlets — they present sales price data as both median and average values. These values are used to track sales prices over time to identify trends in sales activity nationwide and regionally. While both median and average values are freely available to anyone with internet access, the median values are often the ones quoted in the popular press.

By focusing exclusively on median values, however, one can miss interesting trends.

For example, on a nationwide level and in three of the four regions identified, median and average home sale prices have been tracking at around the same relative spread since 2005. In the West region, however, the median sales price has been falling faster than the average price.

This widening variance helps tell the story of what’s been happening in Western real estate markets in the past few years. In most markets, high-priced homes have retained their value better than homes that are closer to, or below the median. Since so many lower end homes are being sold, many after foreclosure, the sheer volume of these transactions is dragging down the median figures. The average, on the other hand, is propped up by the few expensive homes still being sold.

This analysis then begs the question, why does the trend only exist in the West? As other regions decline, can we expect the same pattern to play out? Why are higher priced homes holding up better? If expensive homes begin to lose their value, what would that do to the median and average sales prices? What does the data look like on a city or zip code level?

It’s easy to see that just by comparing the median and average sales price trends, much insight — or at the very least another list of questions — can be gained.

I could go on all day about the wealth of information that such a seemingly simple statistic as the average can provide those with the patience and curiosity to “drill down” past the headlines. But my point is simply this: Pay attention! Don’t let the evening news or your favorite web news source gloss over the statistics to prove whatever skewed point they want to make that day. Spend the time to think critically about the information or you run the risk being fleeced regularly for the rest of your life.

At the very least, pay close attention to the source of any information you are receiving, particularly when that information comes in the form of a statistic. If you are being presented with a descriptive statistic like an average or a median, notice which one you are being given and pause for a second to think about why they used one and not the other.

Furthermore, if you notice that a single set of data is being described interchangeably by median and average, this should throw up a huge red flag as to the reliability of the information and its source.

By AUSTIN NELSON

Existing home sales fell again in October, reversing gains seen in September. The National Association of Realtors, or NAR, released October existing home sales data today, which show decreases in units sold as well as median sale price across the country. The annual price decline was the worst on record, continuing the worst housing slump since  the Great Depression.

Nationally, existing home sales fell a seasonally adjusted 3.1% month-over-month, representing a 1.6% drop from a year ago. In September, sales improved from last fall’s atrocious levels – data the NAR pointed to as a sign of stabilization in the housing market. This assessment appears to have been premature. October’s decline in sales is more in line with the current economic climate of rising unemployment and severe home equity losses.

Sales were down throughout the country:

• Northeast: -1.2% m/m, -9.8% y/y
• Midwest: -6.0% m/m, -9.1% y/y
• South: -3.2% m/m, -10.2% y/y
• West: -1.6% m/m, 37.5% y/y

A few of these numbers are worth singling out.

First, the Midwest was hardest hit, evidencing the fallout from the troubles with the automakers. Second, sales in the West fell, following improvment in September. Again, the NAR had pointed to last month’s gain as an indicator of market health, claiming the West’s markets were showing renewed strength after being the hardest hit to date. The decrease last month shows that this “renewed strength” is typical NAR spin: Even drastic reductions in home prices could not stimulate sales growth in the region.

The figures released on median home sale prices are perhaps even more revealing as to the current state of the housing market.

Nationwide, home prices tumbled 4.2% month-over-month. The largest drop was seen in the West, which saw a dramatic 9.3% decrease. This decline came in the context of a market that had already seen 25% lower home prices than the peak in 2006. Markets in regions that have thus far held up better should expect continued deterioration if they follow a similar trend.

From a “rosier” perspective, this large drop in median price was due at least in part to the paralysis in credit markets over the last two months. The restriction of credit to the private mortgage market dramatically reduced the availability of jumbo loans – which are not backed by the government – preventing buyer’s from bidding on expensive homes.

As a result, the mix of homes sold in October was likely skewed towards the cheaper properties that are available for purchase using loans offered by Fannie Mae, Freddie Mac and the FHA. This concentration of lower priced homes helped push down the broader, median home price data reported by the NAR. As credit markets improve, albeit slowly, this effect should ease pressure on the broad indicators.

Rosier perspective aside, further nationwide declines in home prices and sales should be expected, as  economic conditions continue to erode. However, as the earth-shattering financial events of the past few months play themselves out, it will be important to watch the West as a bellwether of national markets.

The West has led the way in declines thus far, so it is reasonable to look to this area as a proxy for how economic hardships will affect other regional housing markets. Furthermore, as the West has seen the lion’s share of the market pain thus far, signs of true stabilization should appear there first.

Finally, it is important to note that regional economic numbers can conceal even the largest of local trends. Within local Western real estate markets, conditions are widely varied, with some markets only beginning to decline and others beginning to show truly renewed strength.

Only time, and feverishly detailed scrutiny will allow effective market analysis in these unpredictable and volatile times.