The Problem of Measuring Average Neighborhood Housing Prices

Even today, it's very normal to see high double digit housing price numbers in New York neighborhoods.The thought recently came to me however of new developments' effects on prices and what this means to homeowners.

Without taking development into account, housing prices get skewed. If newer buildings are added, the average price of a house will not be a reliable indicator of how an individual property is expected to perform. 

To see how unclear this sort of measure makes things, consider a neighborhood with a group of equal units worth $300,000 each. Over a period of time, those units increase to $310,000. During that same period, the housing stock increases by 25%. and these new units are of higher quality and worth $600,000. 

The average price of this neighborhood is now $368,000, and one would be tempted to say housing prices have increased by 23%. While true, this has absolutely no bearing on what will happen to your individual house. Based on the evidence, all one can say about the neighborhood is house prices increased by 3%,

This sort of mismeasurement has several implications. Expensive new development leads to a price differential between new and old units. This is a direct causal link between new development and increasing prices in existing units, which may or may not be counteracted by the increasing supply further satisfying demand.

More importantly, this does something to the psychology of real estate. In an area with increasing housing values and at least some development, the average price of a neighborhood will ALWAYS overestimate what's actually happening to each individual house. But, you can be sure that developers will point to this number when trying to sell $600,000 units. 

Overall it just proves how important it is to really think about what measurements mean. Something that may seem clear may actually be systematically misrepresenting what you truly would like to know, and uncovers unseen mechanisms in a market.