Why Home Price Fluctuations Can Be Misleading
In the real estate market, you may come across different reports and headlines that seem to contradict each other. One such case is the discrepancy between median home prices and repeat sales prices. Understanding the methodology behind these reports can help you make sense of the conflicting information.
The National Association of Realtors (NAR) releases the Existing Home Sales (EHS) report, which focuses on the median sales price. This approach measures the middle price point at which half of the homes sold for a higher price and half for a lower price. If a greater number of lower-priced homes are sold, the median price can decline even if the value of individual homes is rising.
On the other hand, repeat sales methods, like the Case-Shiller and FHFA indexes, calculate changes in home prices based on sales of the same properties. This approach eliminates the problem of accounting for price differences in homes with varying characteristics.
The challenge with relying solely on the median sales price is that it can paint an incomplete picture. While the EHS report may indicate falling prices, other repeat sales reports often show appreciating prices. Bill McBride, an expert in the field, suggests that repeat sales indexes are more reliable for measuring price changes.
To further illustrate the point, consider a simple analogy using coins. If you have three coins and line them up by value, the median value represents the middle coin. However, rearranging the coins does not change the value of each individual coin. Similarly, changes in the median price do not necessarily mean that home prices are falling. It may simply reflect a shift in the mix of homes being sold based on affordability and current mortgage rates.
Understanding this distinction is crucial when interpreting media reports on falling prices. Remember that the median price does not accurately represent the value of individual homes. It's essential to consider factors like affordability and mortgage rates, which influence the mix of homes being sold.
For a more comprehensive understanding of home price trends and reports, feel free to reach out and connect with us. We're here to provide you with valuable insights as you navigate the real estate market.
