The Irrelevance of the Median Home Price in Today's Market

Later this week, the National Association of Realtors (NAR) is scheduled to unveil its latest report on Existing Home Sales (EHS). This monthly publication offers insights into the sales volume and price trajectory of pre-owned houses. In the forthcoming release, it is anticipated that the report will indicate a decline in home prices. This can be perplexing, particularly if you have been keeping up with blogs suggesting that home prices have reached their lowest point and are now on an upward trend.

Hence, why is it probable that this forthcoming report will indicate a decrease in home prices, despite numerous other reports suggesting an upward trajectory? The divergence lies in the methodology employed by each report. The National Association of Realtors (NAR) focuses on the median sales price, while alternative sources utilize repeat sales prices. Let's explore the distinctions between these approaches.

According to the explanation provided by the Center for Real Estate Studies at Wichita State University, median prices can be understood in the following manner:

"The concept of median sale price involves determining the 'middle' price of homes that have been sold, signifying that half of the homes were sold for a higher price and half for a lower price... For instance, if there has been a greater number of lower-priced homes sold recently, the median sale price would decrease (as the 'middle' home now falls into a lower price range), even if the value of each individual home is actually increasing."

Investopedia aids in defining the repeat sales approach as follows:

"The repeat-sales method calculates fluctuations in home prices by analyzing sales of the same property, thereby eliminating the challenge of accounting for price disparities among homes with different characteristics."

The Challenge with the Median Sales Price Today

As indicated by the aforementioned quotes, these approaches can convey divergent narratives. Consequently, median price data, such as the Existing Home Sales (EHS) report, may indicate a decline in prices, despite the majority of repeat sales reports revealing a renewed appreciation in prices.

Bill McBride, the author of the Calculated Risk blog, summarizes the difference as follows:

"Median prices are subject to distortion due to the mix of properties, whereas repeat sales indexes such as Case-Shiller and FHFA are likely more reliable for measuring price changes."

To emphasize this point, here's a straightforward illustration of median value (refer to the visual below). Imagine you have three coins in your pocket and you arrange them in ascending order based on their values. If you possess one nickel and two dimes, the median value (the middle coin) would be 10 cents. However, if you have two nickels and one dime, the median value would now be five cents.

In both scenarios, the intrinsic worth of a nickel remains five cents, and a dime retains its value of 10 cents. The value of each individual coin has not changed.

Therefore, relying on the median home price to assess the state of home values is currently not meaningful. For most buyers, home prices serve as an initial reference point to determine if they align with their budgets. However, the majority of individuals purchase homes based on the affordability of their monthly mortgage payments, rather than solely considering the house price. When mortgage rates rise, one may need to opt for a less costly home to maintain an affordable monthly housing expense. Due to this precise reason, a higher number of relatively affordable houses are being sold at present, resulting in a decline in the median price. Nevertheless, this does not imply that any individual house has actually lost its value.

When encountering media reports of falling prices in the coming week, bear in mind the analogy of coins. It is crucial to understand that a change in the median price does not necessarily signify a decline in home prices. Instead, it indicates that the composition of homes being sold is influenced by factors such as affordability and prevailing mortgage rates.

Bottom Line

To gain a comprehensive understanding of home price trends and reports, it is advisable to seek guidance from a local real estate professional.