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Market Stats

Glossary – Real Estate Terms Defined

When researching housing markets you’ll frequently hear people using a variety of terms to indicate where the market is currently. The most common is Average House Price, then Benchmark House Price and finally “HPI” or House Price Index.

For quick reference, here’s simple definitions of each of the terms:

Average (Mean) home price: The average of all house prices within a category, e.g., the total of all condo sale prices in Nanaimo divided by the number of condos sold there. A mean average is the average price obtained by dividing the total dollar volume of sales by the number of sales.

Benchmark home price: MLS® estimate of the value of a “typical” home in a community, based on the most popular combination of features, e.g., age, size, number of bedrooms and bathrooms. You’ll find separate benchmark prices for detached, attached and condo homes.

Creampuff: A well-priced, clean, spiffy, beautifully maintained house in a fine area. Every buyer`s dream house is a creampuff. And so is every agent`s dream house-because creampuffs sell fast.

Gentrifying: A term commonly used to describe the current trend in the old city area of Nanaimo. Gentrifying or Gentrification, means to alter (a deteriorated urban neighborhood) through the buying and renovation of houses and stores, raising property values but often displacing low-income families and small businesses. In other words to alter a neighbourhood to conform to an upper- or middle-class lifestyle; make appealing to those with more affluent tastes.

House Price Index: MLS® has its own HPI which traces the price trends for detached, attached and apartment properties. The baseline of 100 was set on Jan. 2005 prices. Some highly populated areas have been broken down for more complete data. The MLS® HPI is an alternative measure of real estate prices that provides a clearer picture of market trends over traditional tools such as mean or median average prices.

The MLS® HPI  concept is modeled after the Consumer Price Index, which measures the rate of price change for a basket of goods and services. A basket is the combination of goods and services that Canadians buy most such as food, clothing, transportation, etc.

Instead of measuring goods and services, the MLS® HPI measures the rate at which housing prices change over time taking into account the type of homes sold.

Median home price: all of the sales prices are arrayed in numeric order. In the case of an even number of sales, the median is the highest price in the lower half of the group. If there is an odd number of sales, the midpoint sale is taken as the median.

Mortgage Stress Test: For uninsured home buyers (anyone who qualifies with a down payment of 20% or more) the minimum qualifying rate is based on either the Bank of Canada’s five-year benchmark rate (5.14% at the time of writing) or the rate offered by your lender plus 2% – whichever is higher.

Sell Price / List Price: This metric conveys important information about a sales negotiation. Here’s how you calculate it. Every home seller’s dream is to close the sale quickly and get a final price that’s at least as high as the asking price. Conversely, a home buyer wants to negotiate the figure down as far below the asking price as possible. In numerical terms, a seller wants a sale-to-asking price ratio of something like 105%, while a buyer would prefer a ratio that’s closer to 90%.

Exactly where the two parties meet on that spectrum depends on many variables, the biggest being overall market conditions. Recently, buyers have held good leverage in these negotiations: On average, they bought homes for 98% of the asking price in 2015, according to the National Association of Realtors.

So how do you calculate that ratio of selling price to asking price?

The calculation: Figuring out this ratio, also known as the sale-to-list ratio, is a simple three-step process:

  1. Divide the selling price by the asking price.
  2. Multiply the result by 100 to make it a percentage.

As an example, let’s say the selling price is $289,000, the median selling price for a new home in the U.S. in December, 2015. Meanwhile, the the seller originally listed the home for $300,000. The calculation to figure out the sale-to-list ratio looks like this:

$289,000/$300,000 = 0.963

0.963 x 100 = 96.3%.

In this case, the sale-to-list ratio is 96.3%.

Why it matters
That number gives us a good indication that the buyer held more leverage than the seller in this situation. If that weren’t the case — if, for example, multiple potential buyers had bid on the property — it’s likely that the sale price would have landed at or above the asking price. That scenario would have yielded a ratio of 100% or higher.

The ratio of selling price to asking price is a useful metric not only in home sales, but in any situation where value is determined by negotiations between buyers and sellers. How far the ratio deviates from 100% — and in what direction – tells you important information about the motivations of the two parties, as well as the market dynamics surrounding their agreed-upon sale.

The problem with averages : Before the original HPI was introduced, REALTORS® and the public relied on monthly average pricing statistics to understand trends in housing prices.

Averages, however, can be very misleading since the quantity and quality of the properties sold in any given area change over time for any number of reasons. As a result, average prices can fluctuate dramatically, making the housing market appear unstable.

To demonstrate this point, let’s look a couple of examples of how average prices are affected by various changes in sales patterns.

 
Year 1 ($) Year 2 ($)
1. 139,000 1. 139,000
2. 145,000 2. 145,000
3. 230,000 3. 230,000
4. 265,000 4. 265,000
5. 290,000 median average 5. 290,000 median average
6. 320,000 6. 320,000
7. 365,000 7. 365,000
8. 425,000 8. *545,000
9. 480,000 9. *580,000
Total $2,659,000 ÷ 9 sales = $295,444, which is the mean average Total $2,879,000 ÷ 9 sales = $319,888, which is the mean average
*price change from Year 1
Example 1: How mean averages are affected by price changes

In this example, the mean average increased by 7.7 percent while the median average stayed the same. This shows that price changes at either end of the price scale affect the mean average, but can leave the median average virtually unchanged.

 

Example 2: How median averages are affected by price changes
Year 1 ($) Year 2 ($)
1. 139,000 1. 139,000
2. 145,000 2. 145,000
3. 230,000 3. 230,000
4. 265,000 4. *290,000
5. 290,000 median average 5. *320,000 median average
6. 320,000 6. *335,000
7. 365,000 7. *395,000
8. 425,000 8. *400,000
9. 480,000 9. *405,000
Total$2,659,000 ÷ 9 sales = $295,444, which is the mean average Total$2,659,000 ÷ 9 sales = $295,444,which is the mean average 
*price change from Year 1

In this example, the mean average stayed the same while the median average increased by 9.4 percent. This shows that price changes in the mid-range section of the price scale affect the median average, but can leave the mean average virtually unchanged.

Neither of these price measurements take into account the changes in buying pattern — In year one luxury homes in the region are popular; the following year more modestly priced homes are popular. Both methods of price tracking can have the effect of overestimating the market price that home buyers are actually paying for their homes.

Defining the typical home

The MLS® HPI is a more stable price indicator than average prices, because it tracks changes of “middle-of-the-range” or “typical” homes and excludes the extreme high-end and low-end properties.

Typical homes are defined by the various quantitative property attributes (e.g. above ground living area in square feet) and qualitative housing features (e.g. proximity to shopping, schools, transportation, hospitals etc.) toward the home price of properties sold in Nanaimo communities.

These features together become the “benchmark” house, townhouse or apartment in a given area. A benchmark property is designed to represent a typical residential property in a particular MLS® HPI housing market, such as North Nanaimo or the Old City.

For example, perhaps the basket of features for a typical home in a given community includes a 10-year-old, 3-bedroom house without a panoramic or ocean view on a 7,200 sq. ft. lot, with 8 rooms, 2 bathrooms, a fireplace, a 1-car garage and is close to schools. A benchmark price for this home can be created from the individual dollar values given to each of the above features.

The breakdown of each month’s real estate sales in a given area are estimates of current prices paid for bedrooms, bathrooms, fireplaces, etc. Prices for these qualitative and quantitative features are then applied to the typical house model and an index price is estimated for that month. This type of pricing model involves estimating the price of a property’s features rather than the property itself.

Note: The MLS® HPI offers only a benchmark in which to track price trends and consumers should be careful not to misinterpret index figures as actual prices. Benchmark properties are considered average properties in a given community and do not reflect any one particular property.

Real Estate Board of Greater Vancouver

Jeff
Hi, I'm Jeff Wood and I love living in Nanaimo! And I love helping people make their move! My wife and I moved to Nanaimo from Richmond in 2015, after raising our two kids there. We brought along our two precocious Border Collies; Jake and Cochise, who are sure they moved to Doggy Disneyland in the process. We live in Upper Lantzville and love it! Before becoming a Realtor, I was a professional investor owning 8 multi-family properties with 24 tenants. I also spent 20 years as an Executive Headhunter, finding talented people for Fortune 500 clients in the USA and Canada. In that role, I functioned regularly as a professional negotiator, working with both sides to create a win win scenario. I also helped candidates relocate to start their new jobs and thus I have a lot of relocation experience. Now as a realtor I apply all of these hard earned skills to the benefit of my clients, whether they’re buying, or selling, delivering results that move them!
http://jeffwood.ca

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