Why Is the Median Home Price Meaningless in Today's Market?

The National Association of Realtors (NAR) will release its latest Existing Home Sales (EHS) report later this week.  This monthly report contains data on previously owned house sales volume and price trends. Home prices are projected to fall in the upcoming report. This may seem perplexing, especially if you've been following along and seen blogs claiming that housing prices have bottomed out and turned the corner.

So, why will this report likely show that home values are declining when so many other reports show that they are rising? It all depends on the approach of each report. NAR reports on the median sales price, although some other sources utilize repeat sales prices. Here's how they differ.

The Center for Real Estate Studies at Wichita State University explains median prices like this:

“The median sale price measures the ‘middle’ price of homes that sold, meaning that half of the homes sold for a higher price and half sold for less . . . For example, if more lower-priced homes have sold recently, the median sale price would decline (because the “middle” home is now a lower-priced home), even if the value of each individual home is rising.”

Investopedia helps define what a repeat sales approach means:

“Repeat-sales methods calculate changes in home prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics.”

The Challenge with the Median Sales Price Today

As stated in the quotes above, different ways can tell different stories. As a result, median pricing data (such as EHS) may show price declines even when the vast majority of repeat sales reports show price increases.

Bill McBride, Author of the Calculated Risk blog, sums the difference up like this:

“Median prices are distorted by the mix and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”

To drive this point home, here’s a simple explanation of the median value (see the visual below). Let’s say you have three coins in your pocket, and you decide to line them up according to their value, from low to high. If you have one nickel and two dimes, the median value (the middle one) is 10 cents. If you have two nickels and one dime, the median value is now five cents.

In both cases, a nickel is still worth five cents, and a dime is still worth 10 cents. The value of each coin didn’t change.

As a result, utilizing the median home price as a barometer of what's going on with home values isn't worth it right now. Most purchasers use home prices as a starting point to see if they are within their budget. However, most people buy homes based on the monthly mortgage payment they can afford, not the house's price. When mortgage rates rise, you may be forced to purchase a less expensive property in order to keep your monthly housing costs manageable. Because of this, a greater percentage of 'less-expensive' houses are selling right now, leading the median price to fall. 

But that doesn’t mean any single house has lost value. 

Remember the coins when you see headlines in the media about prices falling later this week. Simply because the median price changes does not imply that property prices are declining. This means that affordability and current mortgage rates have an impact on the variety of properties sold.

Bottom Line

Let's talk about home price trends and reports in further detail.