Median Home Sales Prices
The National Association of Realtors (NAR) released it’s latest Existing Home Sales (EHS). This monthly update provides insights into sales volume and price trends for previously owned homes. In the report, you will notice that home prices are on the decline. This could appear perplexing, especially if you've been keeping an eye on blogs proclaiming that home prices have bottomed out and are now rebounding.
So, why does this report indicate falling home prices while numerous other sources insist that prices are on the rise? It all boils down to the methodology employed by each report. NAR reports on the median home sales price, whereas some other sources rely on repeat sales prices. Let's explore the differences between these approaches.
The Center for Real Estate Studies at Wichita State University defines median sales prices as follows:
“The median sale price measures the 'middle' price of homes that were sold, signifying that half of the homes sold for a higher price and half sold for less . . . For example, if more lower-priced homes have been 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 sheds light on the repeat sales approach:
“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 Conundrum with the Median Home Sales Price Today
As the quotes above illustrate, these approaches can yield disparate narratives. This is why median home sales price data, such as EHS, may report declining prices, even though the majority of repeat sales reports demonstrate that prices are once again appreciating.
Bill McBride, the author of the Calculated Risk blog, succinctly sums up the distinction:
“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, consider a simple analogy with coins. Imagine you have three coins in your pocket, and you arrange them in ascending order of value. If you possess one nickel and two dimes, the median value (the middle one) is 10 cents. If, on the other hand, you have two nickels and one dime, the median value now stands at five cents.
In both scenarios, a nickel is still worth five cents, and a dime is still worth 10 cents. The individual value of each coin remains unchanged.
This is why relying solely on the median home sales price to gauge shifts in home values might be perplexing at this juncture. Most homebuyers regard home prices as a starting point to assess affordability. However, most individuals purchase homes based on the monthly mortgage payment they can comfortably manage, not just the home's price. When mortgage rates climb, you might find it necessary to purchase a more affordable home to maintain an affordable monthly housing expenditure.
Hence, an increasing number of 'lower-priced' homes are being sold presently, which is contributing to the decline in the median home sales price. Nevertheless, this doesn't imply that individual homes have lost value.
When you come across media reports indicating falling prices, keep the analogy of the coins in mind. A change in the median home sales price doesn't signify a decline in home prices. It signifies that the composition of homes being sold is influenced by affordability and prevailing mortgage rates.
