Why the Median Home Price Is Meaningless in Today’s Market

Why the Median Home Price Is Meaningless in Today’s Market

Later this week, the National Association of Realtors (NAR) will publish its most recent Existing Home Sales (EHS) report. The number of sales and price trend for previously owned properties are covered in this monthly report. The future statement will probably state that housing values are declining. If you've been following along and have seen the blogs claiming that housing prices have bottomed out and turned a corner, you might find this to be a little confusing.

Why therefore will this data probably indicate that home prices are declining when so many other pricing surveys indicate a rise in prices? Everything is dependent on how each report was conducted. While some other sources use repeat sales prices, NAR reports on the average sales price. Here are the differences between various methods.

The Center for Real Estate Studies at Wichita State University explains median prices like this:

“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.”

Investopedia helps define what a repeat sales approach means:

“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 Challenge with the Median Sales Price Today

The methodologies can communicate various stories, as stated in the aforementioned lines. Because of this, even while the vast majority of repeat sales reports indicate that prices are once again increasing, median pricing data (like EHS) may indicate that prices are declining.

Bill McBride, Author of the Calculated Risk blog, sums the difference up like this:

“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.

A nickel still has a value of five cents and a dime still has a value of ten cents. Each coin's value remained unchanged.

Because of this, it is currently useless to use the median home price as a barometer of the state of the housing market. The majority of purchasers use home prices as a starting point to assess whether a property fits within their finances. But rather than just the house's price, most buyers make their decisions on how much they can afford to pay each month for their mortgage. You might need to purchase a less expensive home during times of rising mortgage rates in order to maintain a manageable monthly housing expense. This is the reason why more "less expensive" homes are selling currently, which is pushing down the median price.

Remember the coins when you see media reports about prices plummeting later this week. Not all price adjustments in the median indicate a decrease in property values. What it really implies is that affordability and current mortgage rates have an impact on the variety of properties being sold.

Bottom Line

For a more in-depth understanding of home price trends and reports, let’s connect.