Why the Median Home Sale Price is Confusing Right now
The National Association of Realtors is scheduled to release tomorrow its most recent Existing Homes Sales (EHS). This monthly report provides information about the volume of home sales and price trends. In the upcoming release it will likely say that home prices are down. This may seem confusing, especially if the blogs you read say that home prices have reached a bottom and are now rebounding. So, why would the report say home prices are dropping when so many others say they’re rising? Each one uses a different methodology. NAR reports the median home sale price, while other sources use repeat prices. The Center for Real Estate Studies, Wichita State University, explains median prices this way: “The median sale price measures’middle price’ of homes that have sold. This means that half the homes sold for more and half for less. . . The challenge with the Median Sales Price TodayAs stated in the quotes above, different approaches can tell a different story. The median home sales price (like EHS), may show that prices are down even though repeat sales reports are showing prices increasing again. Bill McBride, author of the Calculated Risk Blog, summarizes the difference as follows: “Median prices can be distorted by the mix, and repeat sales indices like Case-Shiller or FHFA would probably be better for measuring prices.” Imagine you have three coins and decide to arrange them in order of their value, from low to highest. If you have two dimes and one nickel, the middle value is 10 cents. If you have one nickel and two dimes, the median value (the middle one) is now five dollars. In both cases, a penny is still worth five dollars and a nickel still costs 10 cents. The value of each coin did not change. That’s why using median home sales prices as a gauge for what’s going on with home values can be confusing at the moment. Most buyers use home prices to determine whether they are within their budget. Most people purchase homes based not only on the price but also the monthly mortgage payments they can afford. You may need to buy a cheaper home when mortgage rates are high to keep your monthly housing expenses affordable. This does not mean that any house has lost value. Remember the coins when you hear stories in the news about prices falling this week. It doesn’t necessarily mean that home prices are falling just because the median sales price changes. What it means is that affordability and current mortgage interest rates are affecting the mix of homes sold.
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