Using Statistics to Analyze the Real Estate Market

Understanding the dynamics of a real estate market is crucial for both investors and homebuyers. By using key statistical metrics, you can gain valuable insights into market conditions, pricing trends, and potential investment opportunities. In this article, we’ll explore five essential metrics—median sale price (SP), median days on market (DOM), median lease price, median gross rent multiplier (GRM), and median price per square foot ($/sqft)—and explain how to interpret both the current values and trends over time. We’ll also start with a quick note on why we often prefer the median over the average in real estate analysis.

Why Use the Median, Not the Average?

In real estate, the median is often preferred over the average (mean) because it provides a more accurate reflection of market trends. The median represents the middle value in a set of data, meaning half the properties are priced higher and half are priced lower. The average, on the other hand, can be skewed by extremely high or low values (outliers), which is common in real estate markets where luxury properties or distressed sales can distort the overall picture. The median gives a clearer idea of what a typical property might cost or rent in a given area.

1. Median Sale Price (SP)

What It Tells Us:At a given point in time, the median sale price (SP) tells us the typical cost of a property in an area. It provides a general sense of how expensive or affordable a market is. If the median sale price is high, it could indicate that properties in the area are generally more expensive, which may reflect a high-demand area with desirable amenities or a well-established neighborhood.

What the Trend Over Time Tells Us:When the median sale price increases over time, it suggests rising demand. This could be due to various factors, such as more people moving into the area, gentrification, or improvements in local infrastructure. A sustained rise in the median sale price could indicate that a neighborhood is becoming more desirable and that property values are increasing. Conversely, if the median sale price decreases over time, it could be a sign of declining demand or market correction.

2. Median Lease Price

What It Tells Us:The median lease price is similar to the median sale price, but for rental properties. It tells us what tenants are typically paying to rent a property in a specific area. A higher median lease price often signals a market with more high-income tenants or an area with more desirable amenities.

What the Trend Over Time Tells Us:Rising median lease prices can indicate that a neighborhood is attracting higher-income individuals, possibly due to gentrification or increased demand for rentals. Over time, this can reflect the area's growing appeal, particularly in areas with rising property values or expanding job markets. A decrease in lease prices might suggest a shift in demand, possibly due to a downturn in the area’s desirability or increased availability of rental units.

3. Median Gross Rent Multiplier (GRM)

What It Tells Us:The median GRM is the ratio of a property’s sale price to its annual rental income (sale price divided by yearly rent). A lower GRM indicates that an area is a more lucrative investment because properties are selling for relatively lower prices compared to the rental income they generate. Conversely, a higher GRM suggests that the area may be less attractive for investment purposes, as the price of properties relative to rental income is higher.

What the Trend Over Time Tells Us:A consistently declining GRM can be an indicator of a market that is becoming more lucrative for real estate investors, as properties are becoming cheaper relative to the income they generate. This could happen in a gentrifying area where rental demand is increasing, yet property prices have not caught up to this demand. A rising GRM over time might signal that a market is becoming more expensive for investors, which could suggest that it is reaching its peak or is already overvalued.

4. Median Days on Market (DOM)

What It Tells Us:The median days on market (DOM) measures how long properties typically stay on the market before being sold. A lower DOM indicates a highly competitive market, where properties are in high demand and are selling quickly. Higher DOM values suggest that properties are taking longer to sell, which could indicate lower demand or an oversupply of properties.

What the Trend Over Time Tells Us:If the median DOM decreases over time, it usually signals an increasing demand for properties in that area. This could indicate a seller’s market, where buyers are competing for a limited number of properties. Conversely, if the median DOM increases, it might suggest a cooling market or a shift to a buyer’s market, where buyers have more choices and sellers may need to lower their prices or offer incentives to attract buyers.

5. Median Price per Square Foot ($/sqft)

What It Tells Us:The price per square foot is the sale price divided by the property’s total square footage. This metric helps investors compare properties of different sizes and values, offering a more consistent measure of price across different property types. It’s particularly useful for assessing the relative value of properties within the same neighborhood or market.

What the Trend Over Time Tells Us:Rising $/sqft values indicate that properties are becoming more expensive per unit of space, which is often a sign of gentrification or increasing demand. This could reflect an area with more luxury developments or higher-end buyers entering the market. Conversely, a decrease in $/sqft could suggest a shift in the market where properties are becoming less expensive per square foot, possibly due to a reduction in demand or a move toward more affordable housing options.

These five key metrics—median sale price, median days on market, median lease price, median GRM, and median price per square foot—provide critical insights into real estate markets. However, they are not sufficient on their own for analysing given locations for potential investment. A Savvy investor should consult professional - local real estate agents or brokers, who specialize in analysing markets and would dedicate their time to locating lucrative deals for their clients.