Real estate predictions

August 31, 2006

Every expert has their views on where real estate prices are headed. The various realtor associations regularly issue market forecasts, each real estate professional has his or her own prediction for a particular area, and of course there are also numerous housing economists who opine regularly on the market. But what does the general public think about housing prices? Our friends at have come up with an innovative way of finding out, using “prediction markets” or “knowledge markets.” The notion is that if you create a market where people can buy or sell “shares” in certain future events (such as what median home prices will be in a month), the aggregate buying and selling activities of those people will lead to a general consensus. Think of it as being sort of the real estate equivalent of fantasy football. To test out the idea, I’ve created a sample market at called “Bay Area Real Estate Market in Sep ‘06.” Trading volumes are still a bit thin, but the current market prediction (as of 9:45pm on 8/31/06) for Palo Alto median home sales prices in Sep ‘06 is $1,280,000. Think that number is too high or too low? Go to and voice your opinion by buying or selling “shares” in Palo Alto.


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Reading the numbers

August 28, 2006

Sensationalizing the news probably makes good business sense, since it attracts more readers. Media coverage of real estate news is no exception. “The sky’s the limit” theme of many real estate articles of a year ago has largely morphed into “the sky’s falling!”

Search hard enough, and you can find the numbers to support pretty much whatever case you want. An extreme example: as this graph clearly shows, prices in Atherton increased by 70% from April to May, 2006. Imagine the headline on that one! But for those of you who are disappointed that you now can’t afford a home in Atherton, there’s hope…the headline in July 2006 is that prices have decreased by 50%!


Rollercoaster prices in Atherton make for two juicy headlines

So what’s the message? Three things:

First, keep in mind the source’s bias. Media? Probably trying to sell more newspapers. Real estate professional (like yours truly)? Hmm….maybe trying to sell more real estate.

Secondly, ask if the amount of data being analyzed is enough to warrant a trend. Atherton is a small, fairly exclusive city, and in a typical month there are only eight or so transactions; in a slow month there may only be two or three. You can draw far more accurate conclusions from larger data sets; for cities like Atherton, you probably want to compare consecutive quarters, or even half-years.

Thirdly, look at the metric being used. “Average” is often not a good one since a handful of particularly high numbers can skew your perspective. In the Atherton example above, much of the April to May rise came from four particularly high sales ranging from $8 million to $13 million. A better metric is usually the median.

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