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Caution - Misleading Statistics Abound


You may have seen a headline last week in many large papers and financial news outlets, proclaiming, “Home prices rocketed in 4th quarter.” According to the ubiquitous headlines, median home prices were up 14.9% in the 4th quarter alone, the fastest pace ever recorded. Wow! I’ll bet you think your net worth just took a leap. But hold on, let’s read “under the headlines.”

The articles I read correctly stated that the rise in the median home price was the highest ever recorded. Whether this was tailored to be a political statement is anyone’s guess, but at best it is misleading to most people. Did your home’s value increase 14.9%? Likely, not even close. So, what gives?

One of the oldest sayings in math (and journalism) is that “figures lie, and liars figure.” Combine that with another old adage that states that “there are 3 basic kinds of lies; white lies, damn lies, and statistics.” Together, these can be used to imply to a reader that something is better or worse than the actual statistical meaning. (In today’s journalism, add lies of omission.)

What’s the problem? The word “median,” is an often-misunderstood statistical term that describes consumer preferences more than housing prices. The median sale is defined as the sale which has an equal number of sales lower and higher in price, regardless of actual value. Any individual home may have increased in value, decreased in value, or stayed the same. That has no effect on the median value.

Variables that influence the median sale value include economic conditions, the supply of housing in all price ranges, changing consumer preferences, tax considerations, and a host of other decision-making criteria. None of these factors applies directly to your home, although some can affect the market value of your homestead. Rarely does any single residence increase by more than a few percentage points in an entire year (yes, it can happen).

A quick example will illustrate my point. Eleven homes sell in a quarter, ranging from $100,000 to $1,000,000. Of these, 5 are below, and 5 are above, the “middle” house, which for argument’s sake is $500,000. The median sale for that period is $500,000. Now let’s say that a similar group of 11 sells next quarter, but the highest value home is $2 Million. The median price is unchanged, but the average sale price rises. In the next quarter, low-priced homes are no longer available, as investors have been gobbling them up. Now the lowest-price sale is $200,000. Median sale? Still $500,000. Average sale? Up.

Reading statistics requires careful attention, as well as an understanding of the use of statistics. Writers often support a particular point of view and slant their stats accordingly. Go figure.

Van Wie Financial is fee-only.  For a reason.