Median Price Increase in a Declining Market

It’s not the first time that California has been home to some anomalous social phenomenon that lacks a ready explanation. But this time, because it has to do with real estate, the topic may be of general interest.

The oddity is this: On the one hand, the real estate market is, to say the least, a bit slow. The inventory of homes for sale is at all time highs, while the numbers of sales are at the lowest point in decades. On the other hand, the median price in much of the state is at or near record highs. Statewide, the median price of a single-family home is most recently reported as $591,180, barely off the highest ever. In our area, the median price of a residential dwelling is a record high around $600,000.

Now, this seems to fly in the face of whatever we might have learned in Economics 101. If supply is high, and demand is low, prices should be declining. How is it that the median price keeps climbing?

Not only does the increasing median price counter our expectations, it also doesn’t square with the experience of real estate practitioners. I have personally spoken with dozens of local Santa Clarita, San Fernando, and Antelope Valley Realtors® who say that they see prices decreasing in the neighborhoods where they do business. So, how can the median price keep rising?

First of all, we need to remind ourselves of what the median is. It is the mid-point. In any given period, the median sales price represents that price where an equal number of sales were below it and above it. It is not the average. For example, in the series of numbers 1,2,5,10, and 12, the median is 5, whereas the average would be 6.

How can the median mislead us? Imagine a marketplace where eleven homes sold, with the lowest being $200,000, and each other selling for $100,000 more than the one that preceded it. Next, imagine the same marketplace a year later, where each house sold is at a price 10% less than it was the year before, and the two lowest-priced houses don’t sell at all. Respective tables of these markets would look like the following:

Year One Year Two

$200,000 No Sale

$300,000 No Sale

$400,000 $360,000

$500,000 $450,000

$600,000 $540,000

$700,000 $630,000

$800,000 $720,000

$900,000 $810,000

$1,000,000 $900,000

$1,100,000 $990,000

$1,200,000 $1,080,000


In the first year, the median price is $700,000, with five sales below it and five sales above it. In year two, the median price is $720,000, with four sales below it and four sales above it. The second year median is $20,000 higher than the first year, even though values in the second year had decreased by 10% across the board.

Some suspect that the same thing is going on in the southern California market right now, and perhaps across the whole state.

It is no wonder that what might be called “entry-level” sales have dropped. For one thing, as many have observed for the past years, the price of entry had just become too high. The only thing that enabled entry into the market was the use of those now-infamous sub-prime and exotic loan products, including 100% financing and no-doc loans. Now, those are pretty much gone.

Along with the disappearance of the E-Z loans comes a drop in the sale of lower-priced homes, which ripples right up the entire housing market. And the ironic by-product? An increase in median prices, even while values go down.

Changes in the mix of housing in the local area can also skew the median price. For example, in the last few years homes were built that were generally higher-priced than the average price of the existing housing composition. As those homes have gone to a re-sale status, the median price sold for all homes in the area goes up.

This confusion about what the median sales price really means has given many sellers empty confidence in holding onto higher than market price list prices, which as the market makes a dive to the bottom, can significantly hurt them when their home does sell for much lower than they could have gotten at the beginning of the listing period.

Nobody wants to 'give your house away', but without exception I hear that phrase from sellers. As your listing agent, I do want to get absolutely the highest price possible given the market. It is a very competitive market environment, and I do closely watch market trends. Take my advice... you will end up netting a higher price if you do.