Does MLXChange MLS Software Calculate Price Per Square Foot Properly?

I have have been critical of our new Austin MLS System called MLXChange since it was first placed into production in Austin in November 2007. It produces what I believe to be incorrect data. I was contacted yesterday by a product manager from MLXChange because they saw my last blog article showcasing some of the bad data. In that article, I mentioned that the price per square foot is not calculated correctly by the system.

The product manager was very nice and I enjoyed our conversation. She wanted to explain to me how the average price per square foot numbers are calculated and that, in fact, the numbers are calculated correctly. She is right on a certain level. That is, if one understands and follows the formula being used by MLXChange, it can be argued that their number is a mathematically correct.

But I maintain that the method being used by MLXChange to calculate average price per square foot is not the correct formula. I’m not smart enough to articulate it in a scientific or mathematical argument, but my intuition and instinct tells me I’m right. I’ll do my best to explain below and I hope a smart reader can chime in and offer a mathematical or statistical point of view and explanation of why two different methods, each of which seems correct independently on face value, produce different results.

So let’s look at an example that illustrates the MLXChange formula versus the method I believe most of us would use, and the method I believe makes the most sense. I’ve created a small sample set of data, shown in the chart below.

Price Per Square Foot Calculation Method
Example

Square Feet
Sold Price
Sold $ per SQFT
House 1
1200
$150,000
$125.00
House 2
1300
$110,000
$84.62
House 3
1400
$95,000
$67.86
House 4
1500
$120,000
$80.00
House 5
1600
$85,000
$53.13
MLXChange Avg
1400
$112,000
$82.12
My Average
1400
$112,000
$80.00

What is the average sold price per square foot of the 5 homes shown above?

MLXChange computes the Average Price per Square Foot by adding together all of the individual price per square foot numbers (the five psf numbers in the far right column) and dividing by the number of sales (five). This produces a result of $82.12 per square foot as the average price per square foot of the sold homes in our sample set.

I compute the average price per square foot by taking the average sqft size of all homes (1400) and dividing it into the average sold price of all homes ($112,000). My result is $80 per square foot. That’s what you would see on a stats chart that I manually produce and post regularly on this blog.

The two methods, in this particular example, produce results that are 2.65% different. 2.65% is not an insignificant amount when pricing a home. It’s a bigger gap than the List/Sold price difference on most sold homes in Austin. It’s a $5,300 difference on a 2500 sqft home at our example psf rates. Would you like to sell your home for $5,300 too little? Would you like to pay $5,300 too much, based on your Realtor’s CMA, produced by MLXChange?

Let’s dig deeper into why I think the MLXChange method is flawed.

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