Liars, Damn Liars, and Statistics for real estate

Todd Miller: Hello and welcome to Todd Miller TV and this is my third day a row in front of the white board.

I got a request from a client to use the white board more because I guess it’s more informative and explains things. So in the last two videos I talked about freakonomics and statistics and I want to go over some statistics and explain why they’re a very powerful tool especially in real estate. You probably see that most of the time when they talk about what happened in real estate or what’s going to happen that use statistics. They take these analyses, they just take numbers and they crunch them. Sometimes they don’t think, sometimes they’re not looking at what they’re really doing. I’m going to give you one of the numbers they use, what it means, and then how it can change for no reason at all and that means no reason for it to change but it’s a different number and it’s called a median. Now some of you think when you hear median, if you have a statistics background, it’s like an average. Well it’s not an average. Median means middle. So let me give you an example. So I’ve got five numbers up here and we’ll just, for our sake, they could be numbers or they could be home price sales in thousands of dollars. So I’ve got 80, 100, 120, 125, and 130. So this could be an $80,000 sale, $100,000, 125, 130. We’ll just say this is in a neighborhood, we’ll keep it hyper local, it’s in one neighborhood. So we’ve got five home sales for 80, 100, 120, 125, 130. Well the median number is 120. So what that means is they’re going to report in that neighborhood the median home sale’s 120. Well that’s not the average because if you can see here, this 80 is a lot less than the difference, that 40 difference is a lot less than this 10 difference. The average is actually going to be down here somewhere. Now our average is going to be close to 110. But they don’t use the average, they use median. This is why median is sort of a dangerous number. Let’s say that the next year these houses all sell to a new person for the exact same amount. They don’t change.
This house sells for 130, this house 125, these houses sell for this amount. You’re going to say home prices didn’t go up, values didn’t increase, but what if some two new people sold their houses that weren’t included in these houses. They were just different people. Let’s say that there were two new people, one person sold their house for 140 and one person sold their house for 142. Well the median now, because we have seven numbers, is this. So what happened was these houses all sold, the same house to a different person for the same amount of money but because two new homes that were more valuable came on the market sold, and that’s probably what they worth the year before too, they reported and we’re going to see median home prices have gone up $5000 so all of a sudden people sort of get this expectation. Well, guess what? It can go both ways. So what if some home builder moves in and they decide to build really small houses or condos that get calculated into this number and they’re out here building these – let’s just say they’re building $90,000 condos and they build and sold 10 of them. Well what’s going to happen now is the median is now going to be 90 because they’re going to report the median home prices have plummeted. So you have to be careful when you’re looking at the statistics, when you’re looking at numbers. This happened to all the time where the sales mix changes and they’ll have a good mechanism to take that into account. It’s really easy for them to grab data and go “Yeah, that’s the median home price. They’ve gone up. They’ve gone down.” And they quote that number all the time so you just want to be careful, be aware out there when you see that. Really if you want to find out what’s going on you’re going to have to talk to somebody in the market, hyper local, who knows what’s going on, then can explain the sales mix – is REO all at the low end, is it short sales at the high end, what made those values change – because you’re going to start hearing reports now, is the market stabilizing, prices going up, prices are going down, and they’re going to be in conflict with each other. So anyway, that’s my statistics update and I just want to remind you, you can follow me at twitter@LasVegasTodd. If you go to ToddMillerTV.com, if you’re watching this on YouTube, you go to ToddMillerTV.com – there’s a place you could put your email address – every time I do a video it will shoot out an email to you. And there’s my cellphone number so if you want to subscribe and watch the videos that would be great to. Thanks for tuning in and I hope to see you on the next video.