Economics and the Median Home

In My Humble Opinion
1

I was going to put this in GQ, but I don’t really think it has a factual answer. So, I leave it up to you to decide.

My friend and I looked at this website and got into a disagreement about the validity of using these kinds of figures to come up with a definitive rating for how good a place is to live.

Basically, she said that the median home price is a the best estimate of how good a place is to live since it has a strong basis in demand. Essentially, she said that people who earn more money move to places that are nice because of what those places offer. As a result, they help increase property values and thus, increase median home price. Because that one factor (median home price) is essentially a combination of other factors (schools, house size, parks, weather, etc…), she stated that it was a pretty definitive rating for what a nice place to live is. As for the standard of living argument, she countered with the statement that this is factored into the median income of the area. Thus, higher median home price automatically makes for a better place to live.

I replied basically saying that was BS in almost every way. Maybe in an idealized world her logic would be right, but since we live in a world of real people, the relative value of median home price cannot be the “be all, end all” of what is a nice place to live.

I said she failed to account for the fact that not everyone was the same and that not everyone wanted the same things, but she replied that all people act in a logical, self-interested way. I said that taxes are higher, but she replied that that was reflected in higher incomes.

I do not know enough about real world economics to come up with a complete rebuttal though (maybe I’m wrong, even). Logically, what I say makes complete sense to me, but if anyone out there can explain this to me better, that would be nice.

2

I’m with you. My town is on the list, and I’ve been to or lived near several others, and the fact that our home prices are high in no way makes it better than others. We are one of the safest cities in America, which I am sure helped.

Getting the best place to live out of a table is absurd, anyway, since it is so personal.

3

I agree with you.

People make their housing choices based on a lot of stuff besides market forces. For example, some place in Wisconsin might be the best damn place ever, but no matter how rich I am I will never move there because that is not where my career is and that is not where my family is. Careers and families move around based on forces completely different than the ones that govern standard of living. And I think those two things are always going to be more important than parks and schools and whatever.

And then there is the fact that home ownership is pretty long term. People keep their houses for decades, even generations. Only a small portion of society upgrades their standard of home ownership more than a couple times in their lifetime. And thats not even getting in to what renting does to houseing markets. In short, the housing market responds to supply and demand in a very different way than, say, toothpaste.

Finally, home prices are likely going to be higher where you can’t build a lot of houses and cheaper where you can. This is limited by natural formations, zoning laws and other non-market forces. Living in Mahattan might be equally as appealing as living in a California suburb. But X amount of people have to live in Manhattan or at least insist on it. And theres never going to be a big new batch of Manhattan housing. But the California suburb can sprawl all it wants, accomodating both the people that need to live there for whatever reason and the random people that are just looking for a nice place to live. So of course the limited housing in Manhattan is going to be pricey. And yet every town has to accomodate the people that clean it’s floors and serve it’s fast food.

This is pretty easy to observe by looking at the people who crowd into tiny apartments in expensive towns when their rent would probably outright buy a mansion in Idaho. They’ve got ties to wherever they are that are more than simply getting the best bang for their buck.

And then there is the fact that people look for different things in housing. The page you linked to considered rapid growth to be a positive sign. I consider that to be a sign on suburbanized sprawl, and I’d rather live in a dingy horrible part of a city than even the nicest suburb. My favorite parts of town are the funky marginlized areas, not the places where the big, nice, expensive houses are.

So in conclusion, there are just too many factors affecting the houseing market and individual needs for price to be a solid indicator of how good a certan area is for any given individual to live in.

4

For the record, that is the sort of remark that will get you laughed at by people who are good with statistics. We know that people are different. If that knowledge was useful, we wouldn’t have had to discover measures of central tendency.

Also for the record, being rational in the economic sense in no way constrains what people value. Whether you are greedy, altruistic, or enjoy keeping drifters’ heads in your refridgerator (sp?), you are still close enough to rational to make it a useful approximation. Logic still applies, though not in a simplistic way.

Again for the record, the median house price means that if you rank all the house prices and pick the one in the middle, that one will be the median. The mean house price is the arithmetic average of prices, i.e. add up all the house prices and divide by the number of houses to get the mean. The modal house price is the most numerous house price, so if every house price is unique except for the two houses that cost $1 each, then $1 is the modal house price. Then you have the measures of distribution to look at. Yadda, yadda, yadda.

CNN is telling us that in Alexandria, VA half of the houses cost more than $290,000, and half cost less than $290,000. So for all we know from this number, half of Alexandria is dilapidated slum while the other half is filled with gilded mansions and manor estates, leaving one one schmuck with in the middle with her $290,000 house. I doubt that this would be better than a city with a lower median, but also with a small spread and more even distribution.

In other words, you are right that median house price isn’t a very good basis for deciding what city is the best to live in. The median just doesn’t contain very much information. Additionally, it is arguably true that if a city is a shit-hole, then people will try to get away and this will drive down median house price, and that if a city is delightful, then people will want to move there and this will drive up median house price. So it would be reasonable to say that there is a causal arrow pointing from market forces to median house price. But that is not the inference your friend is making–your friend is claiming that there is an arrow pointing in the other direction; i.e. a city’s relative shittiness or niceness is the only factor determining median house price. It could be that both desirability and Factor X affect median house price, so we can’t say that it isn’t Factor X that is affecting the median house price instead of desirability.

However, you are wrong that logic does not apply and that one can not look at housing, income, and demographic characteristics to make a pretty good guesstimate as to whether a place is desirable.

5

True, except my argument to her was that this was still only a guesstimate. One cannot just look at the median home price and say that based on that alone, you can assume a $300,000 home is better than a $250,000 one. Her argument was that you could.

6

I suspect that in most cases you can assume a $300,000 house is better than a $250,000 house… but really, it’s not a guarantee.

The obvious example would be, say, Silicon Valley, where house prices are absurdly high. $400,000 there will buy what you can get for half the price anywhere else. Land is hard to get in California due to the large population and restrictions on high rises.