08 March 2006

Post Business Section Math Challenged

Real estate analyst and regular Denver Post interviewee Gary Bauer is a nice guy who knows the local market as well as anybody. I've done business with him. And, he has a quality that reporters love. He's happy to go on the record.

Maybe staff writer Margaret Jackson misquoted him, and fellow commentator, Steve McGuire. Both are them are probably very nice people as well, although I don't know them. More likely, she went through the routine of getting her requisite three quotes about the latest median real estate prices in Denver and dumped them in her monthly story on the topic for the Denver Post under the ever present pressure of deadlines, accurately but unthinkingly. But, nobody had their critical thinking hat on real tight when this story was written.

I'm pretty sure that both Bauer and McGuire are both wrong about their explaination of February's decline in median condo and housing prices in Denver. They are quoted as saying:

"This might signal that the high-end market is softening a little and causing prices to adjust downward a little bit," said Steve McGuire of Re/Max Professionals in Highlands Ranch.

Independent real-estate analyst Gary Bauer said that while he's surprised about the size of the decrease in prices, he doesn't view it as a warning sign for things to come.

"Overall, activity is pretty good," he said. "I do believe we're seeing a decrease in realized value for higher-priced homes, but I don't think it's something to be overly alarmed about."

Both of these quotes be good explanations of a change in mean prices (i.e. the familiar add up all the sales and divided them by the number of sales most people call an "average" price). But, a math reminder is in order. The median value is the price which half of the values are higher than, and half of the values are lower than. By definition, a softening of the market restricted to the high end (i.e. only occuring in homes with more than the median price), cannot impact the median price of anything.

It may be perfectly true that the high end market is softening. It could even be true that fewer high end sales are being made, causing them to constitute a smaller share of the market, and thereby driving down the median prices. So it is possible that McGuire's quote above is merely misleading, rather than actually being false. But, "a decrease in realized value for higher-priced homes" (i.e. lower prices on sales of above median priced homes) mathematically can not impact median prices in any way, so my friend Mr. Bauer has either been misquoted (probably not in that he didn't say that, but in that his statement may not have been in response to the median price change question that the story implies that it is). Or, Bauer's statement might be just plain wrong. And, this inaccuracy may not have been noticed by Ms. Jackson, who may not, like me, share the view that the press ought to report, in addition to multiple perspectives on a story, an independent, fact based analysis of what the interviewees have said, to see if they make any sense.

Bauer's valiant attempt to spin a two year low in median condominium prices, and signficiant fall in median single family home prices on the theory that "It means we have more condos available for first-time homebuyers, which keeps the market going.", also isn't convincing. Falling prices and rising numbers of homes on the market strongly suggest that the market is not "going well.", although it does help buyers.

The median price of a Denver condo is now $149,440 (a one month drop of more than 3%) and the median price of a single family home in Denver is now $238,500 (a one month drop of more than 2.5%).

A more realistic analysis would note that mortgage rates up by almost a full percentage point from a year ago to about 6.4% in Denver, and that this is predictably reducing the purchasing power of many Denver area buyers, especially at the low end. The word on the street is that the market, and particularly the condo market is experiencing a real slow down at most price levels.

The real question is whether we are seeing a long feared collapse of Denver's real estate bubble, or whether this is just a one month fluke in a generally flat market that is working its way out of the real estate bubble by not appreciating rather than by experiencing falling prices. Sudden declines in prices and sustained lack of appreciation have the same impact on long term real estate investors (such as home owners not planning on moving and business owners who own their places of business), but a decline in prices is much worse for lenders and leveraged short term real estate market participants, as it could leave some properties upside down with mortgages incapable of being satisfied out of a sale of the collateral. This situation routinely leads to foreclosures, bank losses, rising mortgage interest rates, bankruptcies and other manifestations of economic malaise.

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