It's not the first time that California has been home to some anomalous social phenomenon that lacks a ready explanation. But this time, because it has to do with real estate, the topic may be of general interest.

The oddity is this: On the one hand, the real estate market is, to say the least, sluggish. The inventory of homes for sale is at all time highs, while the numbers of sales are at the lowest point in decades. On the other hand, the median price in much of the state is at or near record highs. Statewide, the median price of a single-family home is most recently reported as $591,180, barely off the highest ever. In Orange County, the median price of a residential dwelling is a record high $645,000.

Now, this seems to fly in the face of whatever we might have learned in Economics 101. If supply is high, and demand is low, prices should be declining. How is it that the median price keeps climbing?

Not only does the increasing median price counter our expectations, it also doesn't square with the experience of real estate practitioners. Although it is not a valid statistical sample, I have personally spoken with dozens of Orange County Realtors® who say that they see prices decreasing in the neighborhoods where they do business. So, how can the median price keep rising?

First of all, we need to remind ourselves of what the median is. It is the mid-point. In any given period, the median sales price represents that price where an equal number of sales were below it and above it. It is not the average. For example, in the series of numbers 1,2,5,10, and 12, the median is 5, whereas the average would be 6.

How can the median mislead us? Imagine a marketplace where eleven homes sold, with the lowest being $200,000, and each other selling for $100,000 more than the one that preceded it. Next, imagine the same marketplace a year later, where each house sold is at a price 10 percent less than it was the year before, and the two lowest-priced houses don't sell at all. Respective tables of these markets would look like the following:

Year One	Year Two
$200,000	No Sale
$300,000	No Sale
$400,000	$360,000
$500,000	$450,000
$600,000	$540,000
$700,000	$630,000
$800,000	$720,000
$900,000	$810,000
$1,000,000	$900,000
$1,100,000	$990,000
$1,200,000	$1,080,000

In the first year, the median price is $700,000, with five sales below it and five sales above it. In year two, the median price is $720,000, with four sales below it and four sales above it. The second year median is $20,000 higher than the first year, even though values in the second year had decreased by 10 percent across the board.

Some suspect that the same thing is going on in the southern California market right now, and perhaps across the whole state. In my own area, San Clemente, sales in the price ranges under $700,000 represented 43 percent of market activity just three years ago; now, sales in those prices have dropped to 23 percent of market activity. Similar decreases in the "lower" ranges can be seen in other areas as well.

It is no wonder that what might be called "entry-level" sales have dropped. For one thing, as many have observed for the past years, the price of entry had just become too high. The only thing that enabled entry into the market was the use of those now-infamous sub-prime and exotic loan products. Now, those are pretty much gone.

Along with the disappearance of the E-Z loans comes a drop in the sale of lower-priced homes. And the ironic by-product? An increase in median prices, even while values go down.