If you’ve followed the real estate news lately, you might have seen that the National Association of Realtors (NAR) is set to release its monthly report on the Existing Home Sales (EHS) soon. This report usually provides information on the volume and price trend for previously owned homes. However, it can be a bit confusing to read that the median home prices are going down. Especially when there are blogs out there that claim that home prices have bottomed out and are going back up. This difference in data leads to a bigger question: why is the median home price meaningless in today’s market? Let’s explore this further.
The NAR reports the median home sales price, which is the price where half of the homes sold for more and half sold for less. Whereas, repeat sales price measures the change in appreciation over time of the same property. This difference is crucial since homes that are on the high end of sales skew the median sales price. This means that any significant changes in the number of homes sold on the high end or low end can make the median price appear as though the whole market has changed.
The Center for Real Estate Studies at Wichita State University explains median prices as follows:
“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.”
The following definition is provided by Investopedia:
“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 Problem with the Median Sales Price Today
As stated in the quotes up top, different approaches can tell various stories. Consequently, despite the fact that the vast majority of repeat sales reports indicate prices are once again increasing, median price data (like EHS) may indicate a decrease in prices.
The difference is best summed up by Bill McBride, author of the blog Calculated Risk:.
“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 median value (see 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.
That’s why using the median home price as a gauge of what’s happening with home values isn’t worthwhile right now. Most buyers look at home prices as a starting point to determine if they match their budgets. But, most people buy homes based on the monthly mortgage payment they can afford, not just the price of the house. When mortgage rates are higher, you may have to buy a less expensive home to keep your monthly housing expense affordable. A greater number of ‘less-expensive’ houses are selling right now for this exact reason, and that’s causing the median price to decline. But that doesn’t mean any single house lost value.
When you see the stories in the media that prices are falling later this week, remember the coins. Just because the median price changes, it doesn’t mean home prices are falling. What it means is the mix of homes being sold is being impacted by affordability and current mortgage rates.
In conclusion, the median sale price is not a reliable indicator of a property’s value or the health of the housing market as a whole. For homebuyers and sellers to make wise decisions and have a realistic expectation of how their market will feel, understanding this difference in data is crucial. The fair value of any home should not be based solely on median home prices, despite the fact that these figures are important indicators of market shifts. Working with a real estate agent who is knowledgeable about the market and all the data is essential to achieving your real estate goals because of this.