Why the Median Home Price is Confusing at the Moment

Tomorrow, the National Association of Realtors (NAR) will release its most recent Existing Home Sales (EHS) report. This monthly report includes data on the volume of sales and price trends for previously owned properties. Home prices are projected to fall in the upcoming report. This may appear perplexing, especially if you've been following along and reading blogs claiming that property values have reached a bottom and have since rebounded.

So, why would this report claim that home prices are declining while so many other pricing surveys indicate that they are rising? It all depends on each person's methodology. The National Association of Realtors publishes the median home sales price, although some other sources utilize repeat sales prices. Here's how those methods differ.

The Center for Real Estate Studies at Wichita State University explains median sales 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 Home Sales Price Today

As stated in the quotes above, different ways can tell different stories. As a result, median home sales price statistics (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.”

Here's a quick explanation of median value (see picture below). Assume you have three coins in your pocket and intend to arrange them in descending order of value. The median value (the middle one) of a nickel and two dimes is ten cents. The median value for two nickels and one dime is currently 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, using the median home sales price as a barometer of what's going on with home values may be confusing right now. Most purchasers use home prices as a starting point to see if they are within their budget. However, most individuals buy houses based on the monthly mortgage payment they can afford, not merely the price of the house. When mortgage rates are higher, you may have to buy a less expensive home to keep your housing expenses affordable.

That’s why a greater number of ‘less-expensive’ houses are selling right now – and that’s causing the median home sales price to decline. But that doesn’t mean any single house lost value. 

Remember the coins when you see headlines in the media about prices falling later this week. The fact that the median house sales price changes does not imply that home prices are declining. This means that the mix of properties sold is influenced by affordability and current mortgage rates.

Bottom Line

Let's talk about how to get a better understanding of home price trends and reports.

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