Segmenting the Market: When a Price Tier Moves Differently From Its Town

Most published market reports are organized by town and are widely available to agents. The report states a median sale price, a change from a year ago, an inventory figure and a days-on-market figure, and it states them for every property in the town at once. The office does not price from those figures, and the reason is arithmetic rather than preference: a town’s median can rise while the prices in the subject’s segment do not move at all, and it can do so without a single seller in the town receiving more for a comparable house. This lesson sets out what a segment is, how the office defines one, and what happens when a listing is priced from the town instead.

What a segment is

A segment is the group of properties that share the subject’s market position, defined by property type, a size band, a price tier, a condition level, and the competitive market area or, where more count is needed, the kind of area within the town. It is the group whose statistics describe the market the subject is in. The competitive market area answers where the subject’s buyer looks; the segment is the statistical group drawn from that answer, and it is often the same set of properties. Where the market area yields too few sales to compute a rate or a median, the segment is widened to the same kind of property in the same tier in comparable areas of the town, and the widening is stated.

The segment has to be wide enough to count and narrow enough to be the subject’s market. Six closings in a period do not make a median; sixty closings across three property types do not make the subject’s market. The office’s working rule is that the segment is defined by the criteria a buyer of the subject would use to sort a search, and that a criterion is generally dropped only when the count requires it, and the file says so.

Administrative boundaries are not used to define a segment unless the sales show a difference across them. Where a town has more than one school district, buyers may take into account which district a property is in. If sales show a difference across that line in price or days on market, the analysis records the difference in the data. It does not describe or rank the schools, the neighborhoods or the people on either side.

How a town median rises while a segment stands still

A median is the middle sale. When the mix of what sells changes, the middle sale moves, whether or not any individual property’s price has changed.

Consider a town whose sales divide into two tiers. The lower tier is ranches and capes of 1,300 to 1,900 square feet, selling between $340,000 and $460,000. The upper tier is colonials of 2,200 to 2,800 square feet, selling between $470,000 and $650,000. In the first year the town records 220 sales: 132 in the lower tier and 88 in the upper. In the second year a subdivision of new colonials delivers and the existing colonials sell more freely; the town again records 220 sales, but 104 in the lower tier and 116 in the upper.

In the first year the middle of the 220 sales, the 110th and 111th, falls high in the lower tier, and the town median is $442,000. In the second year the lower tier holds only 104 sales, so the 110th and 111th sales fall at the bottom of the upper tier, and the town median is $482,000. The town’s report states a rise of 9.0 percent. The lower tier moved 0.5 percent. The upper tier moved 1.1 percent. Neither tier’s median rose by anything close to nine percent; the composition of what sold changed.

What pricing from the town produces

An agent listing a 1,600-square-foot cape reads the report, finds a sale of a similar cape a year ago at $405,000, and applies the town’s 9.0 percent: $405,000 multiplied by 1.09 is $441,450, and the recommendation is $439,900. Before adjustment, similar capes in the segment closed between roughly $400,000 and $415,000. The listing enters the market $24,900 above the highest of those sales ($439,900 against $415,000), is likely to be shown after the properties priced near them, and may need a reduction after they have sold. The seller then faces a price reduction on a listing that was not priced for its market, and the office carries the longer marketing time and the reduction that follows it.

The reverse case also costs the seller. Where a town median is flat or falling because the lower tiers have slowed while the subject’s tier has continued to move, an agent who prices from the town positions the listing below its segment and the seller receives less than the segment supported.

How the office reads a town figure

A town figure is not discarded; it is placed. It appears in the market analysis beside the segment’s figure so that the seller sees both and sees why they differ. When the two agree, the town figure adds weight. When they diverge, the divergence is explained: a mix shift, a tier that has slowed while another has not, a new subdivision delivering into one tier, a change in the kind of property that has been selling. The explanation is usually visible in the tier counts, as in the table above, and an analysis that cites a town figure states the tier counts before relying on its direction.

Application

A market analysis is prepared for a 1,650-square-foot cape in good condition. The three comparables are sound: capes in the market area closed at $402,000, $409,000 and $414,000 over the past five months. The recommendation is $439,900, and the market conditions section reads: “Town median up 9.0 percent year over year; strong appreciation; positioned above the comparables to reflect the trend.”

The segment is pulled. Capes and ranches of 1,300 to 1,900 square feet, widened across the town’s comparable areas for count: 104 closings over twelve months, median $407,000 against $405,000 a year earlier, a movement of 0.5 percent. New pendings in the segment over the past two months match the count for the same months a year earlier, at a median of 16 days to contract, and the segment’s closed sales over the same period sold at a median of 99 percent of list. The town median moved because the colonial tier’s share of sales rose from 40 percent to 53 percent, and the tier counts show it.

Before adjustment, the three comparables closed between $402,000 and $414,000, and the segment’s flat movement gives no reason to position the list price above the range those sales support once adjusted. The recommendation is $412,900, with the segment’s figures placed beside the town’s in the analysis and the mix shift explained in two sentences. The seller’s question about the nine percent is answered with the table: the nine percent is true of the town and reflects a shift in the mix of sales toward colonials; neither tier moved anything close to it.

Summary

A segment is the group of properties sharing the subject’s type, size band, price tier, condition and area, and it is the group whose statistics describe the subject’s market. A town median is the middle of every sale in the town, and it can move when the mix of what sells changes, so that a town can report a nine percent rise while each of its tiers moved less than two. The office prices from the segment, places the town figure beside it, and explains any divergence from the tier counts, because a listing priced from the town enters a market it is not in and the office pays for the difference in marketing time and reductions.