An appraiser computes median sale prices for the same neighborhood quarter by quarter and reads the trend. What is the main hazard of this method?
Correct Answer
D) The mix of what sold may shift between quarters
Quarterly medians can change when the size, quality, location or other composition of sold properties changes. They need not equal matched-property appreciation. Check sample composition and consider appropriately controlled models or matched data; no method automatically eliminates every confounder.
Why This Is the Correct Answer
Option D is correct because quarterly medians can change when the size, quality, location or other features of the properties that sold shift from one quarter to the next. A rising or falling median therefore need not equal matched-property appreciation, so the appraiser should check sample composition or use controlled or matched data.
Why the Other Options Are Wrong
Option A: Median prices are confidential data
Option A, that median prices are confidential data, is wrong because medians are commonly published and used in market analysis. Confidentiality is not the hazard of this method.
Option B: Quarterly grouping violates reporting standards
Option B, that quarterly grouping violates reporting standards, is wrong because grouping sales by quarter is an accepted way to organize market data. The problem lies in what the median reflects, not the time grouping.
Option C: The method overstates the number of sales in each quarter
Option C, that the method overstates the number of sales in each quarter, is wrong because computing a median does not change the count of sales. The median summarizes prices; it does not add sales.
Mix shifts move medians
If the basket of homes sold changes, the median moves even when no home's value changed.
How to use: Use this when a question asks about the weakness of median price trend analysis.
Exam Tip
When a question asks about the hazard of median trends, look for an answer about changes in the mix of properties sold.
Common Mistakes to Avoid
- -Reading a median change as matched-property appreciation
- -Ignoring changes in size or quality of sales between periods
- -Assuming any statistical method removes all bias
Concept Deep Dive
Analysis
This question tests a key weakness of using median sale prices to measure price trends. Medians reflect whatever happened to sell each period, so a change in the mix of properties can move the median even if values of comparable homes did not change. Recognizing this composition effect is the core of the question.
Background Knowledge
Median price trends are easy to compute but can be distorted by changes in what sells, such as more large homes one quarter and more small homes the next. Paired sales, repeat sales and controlled models help isolate true price change for similar properties.
Real-World Application
An appraiser sees the neighborhood median price jump 12% in one quarter. On review, she finds several large luxury homes sold that quarter, and paired sales of similar homes show little actual change in value.
More Market Questions
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