EYE ON THE PIE: How fast are housing prices rising?

May 30, 2005

Dear Jane Bryant Quinn:

I apologize for writing so long after your March 28 column was published in Newsweek. You may have already addressed the issues that concern me. I don't get to read that magazine until it has been around our house for a while.

However, several other tardy readers have asked why housing prices in Indianapolis are falling. They all have the same source: your column.

You wrote: "Prices dropped 4.2 percent in Charleston, W.Va., where the median home sold for $107,200. Two other losers, according to the National Association of Realtors (NAR): Indianapolis (down 3.9 percent; median price $113,400) and Austin, Texas (down 2.1 percent; median $151,300)."

Now, Ms. Quinn, Hoosiers don't like being classified as losers. Nor do residents of Indianapolis take kindly to being lumped with cities that have neither an NBA nor an NFL team.

So, I took it upon myself to check the Web site of the NAR and I cannot confirm your statistics. That is not your fault. I could not find sufficient historical data on the NAR site, which seems designed for ad hoc journalism rather than research.

As I see it, you compared the last quarter of 2004 with the same quarter of 2003 without revealing to your readers the periods being compared. That's why you reported that the price of the median home sold in Charleston was down 3.9 percent. Well, just a quarter later (first quarter 2005 compared with the first quarter of 2004), the median home price in Charleston was up 13 percent.

The same could be said about Indianapolis. Where you reported a decline of 3.9 percent, the next quarter showed an increase of 3.0 percent. All this variability from quarter to quarter might be due to the fact that the data are not seasonally adjusted, and seasonal factors mean more in northern places where we have seasons.

Your point about the fact that some places are doing well and others not so well would have been just as nicely supported by using annual data, also on the NAR Web site. That way, you would have found that Indianapolis rose a meager 0.5 percent in 2004; the Fort Wayne metro area 4.2 percent; Gary-Hammond, 7.6 percent; and South Bend-Mishawaka, 10.7 percent.

However, let's put that aside and talk about the use of median prices as an indicator of market conditions. Usually, you point out flaws in data. Hence, I was surprised you used, without comment, the median price data available from NAR and other sources.

As you and my readers know, median prices for the sale of existing housing are not trustworthy statistics. They depend on the mix of homes being offered for sale and actually sold. At certain times, the market may be dominated by small, lower-priced homes and the median price will fall. It does not mean housing prices are falling, only that the type (and price) of homes being offered by sellers is different from another time.

The same is true between cities. Austin may have many more large, high-priced homes on the market this month, while those for sale in Altoona are similar this month to those of a year ago. The median price (that which divides all prices at the midpoint of the range) reflects that mix of homes in the market and is, therefore, most ambiguous.

The median price and its changes tell us nothing about the mix of homes, nor do we learn anything about values for homes that are not on the market.

Yet you report that "[I]n 2004, prices rose an average of 10.7 percent, the largest increase in 25 years ... " I do not see anything in such a statement other than shock value. If we are now selling more three-bedroom houses and in the past we sold two-bedroom homes, I would expect higher home prices.

Maybe someday you'll revisit these issues in one of your columns.

Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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