Tracking Real Estate Values Beyond Average Home Prices

Tracking real estate prices can be famously tricky. That is why we need to look at a variety of stats to best understand the trend of values. This means looking beyond average home sale prices (addition of all the sale prices divided by the number of sales).

Every month a different “basket” of homes are sold. The number of sales always fluctuates and the product is never identical. Some areas may have more consistent inventory, and some areas have huge variability between homes. Think of the older areas in Oakville, Mississauga, Burlington, Hamilton & Toronto. Within a couple kilometer radius you can see a multimillion dollar spread between the lowest sale price & the highest sale price in a single month. These older areas have a very diverse housing stock in terms of the lot size, home size, level of renovations, age of homes and specific defining features (lakefront for example). If the average sale price in one of the aforementioned areas drops on a monthly basis, did home values really drop? Or was the drop reflective of the differences in the homes that sold from one month to the next? This observation applies to all areas, but can be stark in areas like the ones mentioned above.

For example, in May in Old Oakville sale prices for detached homes ranged from $2,375,000 to $7,000,000. There were 9 sales. And the average was $3,660,667. In June sale prices ranged from $1,300,000 to $3,160,000. There were 5 sales. The average price was $1,886,000. A 47.6% drop in average sale price month to month! Certainly home values didn’t go down that much, and maybe not at all. It requires more investigation.

Old Oakville is more exaggerated than some areas. But it serves a good purpose in making the point. In addition to the average sale price, we would also look at median prices. Median identifies the exact middle point of all sales, where half of the homes sell for less and half for more. Because it is not swayed by extreme outliers (on the high end or low end), it provides a more stable picture of the “typical” home price. We would also rely on the Home Price Index which is a statistical model that estimates the value of a “benchmark” home. The Home Price Index attempts to compare like with like, factoring in features such as property type, location/neighbourhood, size & rooms, lot characteristics & age. The Home Price Index showed a flat market from May to June in Old Oakville for example.

The median & home price index can be more stable than the average, but they are still imperfect when drawing from a limited sample size. Instead of just looking at how prices have behaved in one neighbourhood, we would often “zoom out” to include a larger data set, by including the entire municipality for example. This same idea applies when looking at a single month. Instead of relying on a short period of time, we may “zoom out” and check to see how prices have been trending year to date, and also year-over-year. This way we are benefiting from understanding quick shifts in the market (month to month) while also getting a better sense of longer term trends.

When evaluating the price of a home the most important data for us comes from analyzing nearby relevant homes (“comparables”). We also use the comparables to observe directly how prices are behaving in that neighbourhood.

When you hear a single stat highlighted on the news (“real estate prices up 5% in June, or down 5% in June for example) take it with a grain of salt. It's important to know which stat they are using and is it a month over month comparison or a year over year comparison? How would this stat measure against other ways of tracking the market? This is just a bit of insight into the nuances of reading the market, and how we approach evaluating homes. If you know of someone who could benefit from our advice & services we would value an introduction. We always appreciate your referrals.