Home prices headed in the right direction – down

Today’s front-page Tribune article on housing prices in the region reports that sales volume has been rising in each of the last seven months, but “sellers, take note: Housing prices are headed in the wrong direction.”

Are they? I’m not so sure. It’s true that they are heading down, but that’s not necessarily the wrong direction. Sure, if you own a house, you’d rather see neighborhood selling prices higher rather than lower. But it’s better overall if trades take place for lower prices than if they don’t take place at all.

Some people equate the “value” of their homes with market stats like median selling prices. That is not quite right. Neighborhood comparable sales do not determine the value of a house: they reveal it. When there are no sales, it doesn’t mean housing values are higher, it just means (low) housing values are shielded from view.

I would argue that the “right” direction for housing prices is one where more trades are made. Economically speaking, a trade—even for a low price—makes both parties better off, even if it doesn’t feel like it at the time. A market with few trades tends to scare off buyers and sellers, limiting everyone’s options. In an active market, owners have the option to sell for a lower price or hold on. That’s better than not having the option at all.

Jeff Baird is a real estate valuation consultant based in Chicago. He founded Lakeshore Analytics to bring comprehensive, understandable housing data and analysis to Chicago-area readers. The site features a blog with free market news and charts, summary data on 20 top neighborhoods, and quarterly data subscriptions.

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