The National Association of Realtors (NAR) is set to release its latest Existing Home Sales Report, which may lead to confusion and potentially troubling headlines regarding home prices. The reason behind this confusion lies in the fact that NAR reports the median sales price, while other home price indices focus on repeat sales prices. Most repeat sales indices indicate that prices are beginning to appreciate once again. However, the median price reported by NAR may present a different narrative.
It’s important to recognize why using the median home price as a gauge of home values isn’t ideal at this moment. The Center for Real Estate Studies at Wichita State University explains:
“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. While this is a good measure of the typical sale price, it is not very useful for measuring home price appreciation because it is affected by the ‘composition’ of homes that have sold. 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.”
When people purchase homes, they base their decision on the monthly mortgage payment rather than the overall price of the house. When mortgage rates increase, buyers may have to opt for a less expensive home to maintain affordability. Currently, more “less-expensive” houses are being sold, leading to a decline in the median price. However, this does not indicate that any individual house has lost value.
Even NAR, an organization that reports on median prices, acknowledges the limitations of this type of data. NAR states:
“Changes in the composition of sales can distort median price data.”
To provide a clearer understanding, let’s consider a simple explanation of the median value:
Imagine you have three coins in your pocket, arranged in ascending value (lowest to highest). If you have one nickel and two dimes, the median value of the coins in your pocket is ten cents. If you have two nickels and one dime, the median value of the coins in your pocket is now five cents. In both cases, a nickel is still worth five cents, and a dime is still worth ten cents. The value of each coin remains the same.
The same principle applies to today’s real estate market.
Bottom Line In most markets, actual home values are increasing. However, the median value reported tomorrow may tell a different story. For a more comprehensive understanding of home price movements, let’s connect and discuss the nuances of your local market.
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