Why Median Home Sales Price Is Confusing Right Now

Why Median Home Sales Price Is Confusing Right Now

The upcoming release of the National Association of Realtors' (NAR) Existing Home Sales (EHS) report has brought attention to the apparent contradiction between reports of falling home prices and the prevailing narrative of a rebound in the housing market. This seeming discrepancy can be attributed to differing methodologies employed by various sources, such as NAR's use of median home sales prices compared to others' utilization of repeat sales prices.

The median home sales price, as explained by the Center for Real Estate Studies at Wichita State University, represents the midpoint value of homes sold, with half of the homes fetching higher prices and the other half selling for less. Thus, if a higher proportion of lower-priced homes are sold recently, the median price would decline, even if the individual home values are rising.

In contrast, the repeat sales approach, as defined by Investopedia, calculates price changes based on the sales of the same property, sidestepping the challenge of accounting for variations in property characteristics.

The Challenge with the Median Home Sales Price Today

This dichotomy in approaches can lead to differing narratives. Consequently, median home sales price data, such as the EHS report, may indicate declining prices, whereas most repeat sales reports suggest price appreciation.

Bill McBride, the author of the Calculated Risk blog, succinctly articulates 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 illustrate, consider the analogy of sorting coins by value. If you have three coins - two dimes and one nickel - the median value is 10 cents. However, if the composition changes to two nickels and one dime, the median value becomes 5 cents. Despite this change, the value of each coin remains unchanged.

This analogy underscores why relying on median home sales prices to gauge home values might be perplexing. While buyers often use home prices to assess affordability, their ultimate decision hinges on their monthly mortgage payment capacity. Elevated mortgage rates might necessitate purchasing a more budget-friendly home to maintain manageable monthly housing expenses.

Consequently, a surge in the sales of relatively "less-expensive" homes presently results in a decline in the median home sales price. Nonetheless, this shift does not imply that individual homes have lost value.

When media reports indicate falling prices, bear in mind the coin analogy. Fluctuations in median home sales prices do not necessarily denote falling home values. Rather, they reflect changes in the mix of homes sold due to factors like affordability and prevailing mortgage rates.

Bottom Line

For a comprehensive grasp of home price trends and reports, reaching out for an in-depth discussion can provide valuable insights.