Scott Neal, Eden Prairie City Manager

I work with a lot of smart people here at the City of Eden Prairie. I’m fortunate that many of them read my blog. I’m even luckier that they’ll give me constructive criticism on my posts. I got a good dose of constructive criticism yesterday about the posting I wrote on Monday, October 23 entitled “Eden Prairie Home Prices and Values“. It came from our City Assessor Steve Sinell.

Now the most important thing you should know about Steve Sinell is that he is a fact-driven man. (See my Jan. 7, 2005 blog entry for more about Steve.) He is a numbers guy. Steve’s work must stand up to intense scrutiny. Residents pay attention when someone from the government (i.e. – the City Assessor) tells them what their property is worth. Steve and his staff work very carefully to back up their work with numbers, numbers and more numbers. I always tell people that Steve Sinell doesn’t make the news, he only reports it. It’s really true. The value he assesses to a property isn’t based on his gut instinct. It’s based on market values, sales prices and building rental income information.

So when I composed a posting about home prices and values in Eden Prairie, Steve noticed it. He could not disagree with the facts of the post. But he did tell me that the facts on sales prices from one month in 2005 compared to the same month in 2006 did not really tell an accurate story about what’s happening with home values and prices in Eden Prairie. I couldn’t disagree with Steve, so I asked him to give me a little help with subject. He did. Below is the redo of the Monday, October 23, 2006 posting called “Eden Prairie Home Prices and Values”.

Thanks Steve.
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I get a lot of email. I’m on a lot of email listserves. I don’t mind that. It allows me to catch breaking news and get many perspectives on the news. For example, I got an email update last week from the Minneapolis Area Association of Realtors updating me on the current residential real estate picture of Eden Prairie – from their perspective. Here’s what they are seeing at the moment.In September 2006 there were 195 new listings. This compared to 189 new listings in September 2005. Listings were up 3.2% from last year to this year. Closed sales, however, were down 22.6% in September 2006 compared to September 2005.

The average sales price in September 2006: $416,477. In September 2005: $436,329. Percent change in average sales price from last year to this year: -4.5%. Good news or bad news? Depends on which side of the table you’re on, I suppose.

For the Twin Cities as a whole, new listings were down 5.1% in September 2006 compared to September 2005. Closed sales were down 23.7% for the same time period. The average sales price for a Twin Cities home in September 2005 was $274,670. In September 2006: 283,583; an increase of 3.2%.

Quick take on the numbers: Yes, Eden Prairie home sales prices may be down 4.5% from September 2005 to September 2006, but they are still 47% higher than the average sales price in the Twin Cities.

But just looking at monthly sale prices can be deceiving. A comparison of price changes from August 2006 to August 2005 as an indicator of market change is an unreliable statistic due to small sample size and dissimilar samples.

If the August 2005 group of sold properties (sample) and the August 2006 group that sold (sample) were of a similar makeup the price change and the market change could be the same. But usually they are not – thus the volatility from month- to-month in average and median sale prices. The change in the annual average sale price and median price are much more likely to represent market change as the sample size is much greater. Even the annual price changes are vulnerable to subtle changes in the market.

For example, if in September 2005 15% of the homes that sold were in the high end of the price range and in September 2006 only 3% were in the high end it can skew the average sales price for the month. Here’s a real example from single family sales in Eden Prairie:

For the time period 10/1/2005 to 9/30/06, there were 505 sales in Eden Prairie with an average sale price of $470,697.

For the time period 10/1/2004 to 9/30/05, there were 655 sales in Eden Prairie with an average sale price of $468,370.

For the month of August 2006, there were 55 sales in Eden Prairie with an average sales price of $485,578.

For the month of August 2005, there were 65 sales in Eden Prairie with an average sales price of $499,298.

Based on Annual Price Change, the data would suggest an annual average price increase of 0.50%. The monthly statistic would suggest a decrease of 2.7%. Other indices for single family home prices would suggest a +3% price change on those homes that sold (adjusting for sample makeup).

Here’s an even more specific example.

In the Fairfield neighborhood in Eden Prairie, during the month of August 2006, were 3 sales with an average sales price of $454,000. In the same neighborhood in August 2005, there were 2 sales with an average sales price of $395,000. This suggests a 15% price increase from 2005 to 2006, which is factually correct but probably doesn’t tell the whole story.

Moral of the Story: Monthly sales volume and sales price are important and may represent a “market change”, or not. Annual sales and price information will ultimately tell us a more complete story.