Much has been written about the collapse of the U.S. housing industry in the Great Recession of 2008-09. It's true that the number of total sales decreased from the height of the housing run-up in 2007, and the luxury market on Cape Cod and other hot second-home locations plunged as well. However, the median price of homes on Cape Cod, the most accurate snapshot, barely budged since that time. The median price in 2007 was $365 thousand. Last year, it remained a respectable $360 thousand.
Let's look more closely at this by first distinguishing the difference between the average price of a home versus the median price. Reliance on averages in real estate reporting is a pet peeve of mine because a few luxury sales skew all the figures skyward--something that makes the real estate industry feel good, but one which does not accurately reflect the market.
The truth lies in the median. It is the middle point of a number set, in which half the houses cost more and half cost less. It's the most stable of indexes because the median is less likely to be affected by extreme pricing at the top or bottom of the spectrum, which average is inclined to do.
On Cape Cod, that extreme is often on the high end, with nearly every town or village fortunate enough to have waterfront where homes routinely cost $1 million or more.
In one hypothetical village, in one week, seven homes sell for the following prices: 225K, 240K, 275K, 325K, 350K and two very close to the water sell for 975K and $1.2 million.
The midpoint, or median cost of homes in that village is 325K. Of the seven homes that sold, three homes sold for less and three homes sold for more.
However the average --- the sum of all the prices divided by the number of homes, is 512K, driven up by those two luxury homes at the top. Even though most homes are available in the 200s and 300s, it would appear that houses in the village cost a half-million dollars or more, discouraging some people from jumping into that market. In reality, as the median indicates, the majority of homes can be had for much less
Furthermore, a homeowner wishing to sell her house would think if the average home in the village sells for more than half a million, hers will too, even though something closer to the median price is more realistic.
The average can be skewed in the other direction too. Let's now look at that same village, but this time, switch out the homes close to the water at the top end, and replace them with a couple of "handyman specials" for 99K and 125K on the outskirts of town. All other prices remain the same: 99K, 125K, 225K, 240K, 275K, 325K and 350K.
This time the median, or middle point, is 240K. The sale of two handyman specials instead of two luxury properties only moved the needle by 85K. The village snapshot is still very similar with houses available in the 200s and 300s.
But look at what the handyman specials did to the average cost of homes in the village, fluctuating wildly from 512K before, to just 234K now-- a swing of 278K--enough to buy an additional home!
These examples are simplistic but over time, the numbers add up. According to the Cape Cod and Islands Association of Realtors, the average cost of a home sold on Cape Cod last year was 464K while the median was 360K. That's a difference of 104K, which could buy all the furniture you need for your new place, plus a new car in the driveway.
In 2007 though, luxury buyers drove the average price of a Cape Cod home up to 517K while the median was 365K. In other words, the infamous "correction" had virtually no impact on the median price of a house on the Cape. It only dipped by five thousand dollars in the last five years.
Of course, this is small comfort to those who expect their single largest investment to increase a little every year. Anyway you look at it, homes have lost some value in the last five years, but not at the level many people have been lead to believe.
So when educating yourself about home values, beware the average cost and seek the median instead. It is far more dependable, and less prone to extreme than the average.