Understanding Median Prices
The impending release of the latest Existing Home Sales (EHS) report by the National Association of Realtors (NAR) is generating considerable interest. This monthly publication sheds light on the volume of sales and the trends in pricing for previously owned homes. The upcoming report is likely to indicate a decrease in home prices, a potentially puzzling development, especially for those who have been keeping up with blogs and reports suggesting that home prices had hit their lowest point and were on an upward trajectory.
So, why does this forthcoming report conflict with many other market indicators that are pointing towards rising home prices? The answer lies in the differing methodologies employed by these sources. The NAR report relies on the median sales price of homes, while other sources utilize repeat sales prices. Here’s how these approaches diverge.
According to the explanation from the Center for Real Estate Studies at Wichita State University:
“The median sale price represents the middle price point for homes that have been sold. This means that half of the homes were sold at a price higher than the median, and the other half were sold for less. For instance, if a larger number of lower-priced homes have been sold recently, the median sale price would decrease, even if the value of each individual home is increasing.”
Investopedia defines the repeat sales approach as follows:
“Repeat-sales methods calculate changes in home prices based on sales of the same property, eliminating the challenge of accounting for price differences in homes with varying characteristics.”
This presents the challenge with the current median home sales price data (such as EHS). Despite the majority of repeat sales reports showing a resurgence in prices, the median home sales price data might suggest a decline.
Bill McBride, the author of the Calculated Risk blog, succinctly summarizes the difference:
“Median prices are influenced by the mix of homes sold, while repeat sales indexes like Case-Shiller and FHFA are probably better indicators of price trends.”
To illustrate this point, consider a simple example of median value. Imagine you have three coins in your pocket, arranged from low to high value. If two dimes and one nickel are in that order, the median value (the middle one) is 10 cents. If you instead have two nickels and one dime, the median value becomes five cents.
In both cases, the value of a nickel remains five cents, and the value of a dime remains 10 cents. The intrinsic value of each coin hasn’t changed.
This highlights why relying solely on the median home sales price can be misleading when gauging home value trends. Most potential buyers use home prices as an initial reference to match their budget, but home purchases are typically driven by the affordability of monthly mortgage payments, not just the initial price of the property. When mortgage rates are high, buyers might opt for more affordable homes, leading to a decrease in the median home sales price. However, this doesn’t mean any individual home has lost value.
Therefore, when news reports suggest a decline in prices in the upcoming week, remember the coin analogy. Changes in the median home sales price don’t necessarily indicate falling home prices. Rather, they reflect shifts in the mix of homes sold due to factors like affordability and mortgage rates.
For a more comprehensive understanding of home price trends and analysis, we invite you to reach out to us. We would be delighted to assist you in gaining a deeper insight into these aspects.