Why the Median Home Value is Meaningless in Today’s Market
The National Association of Realtors will release its latest Existing Home Sales report (EHS) later this week. This monthly report gives information on the volume of sales and price trends for previously owned homes. It’s likely that the next release will say that home prices are down. It may seem confusing, especially if the blogs you’ve read have been saying that home prices had bottomed out. Each report uses a different methodology. NAR reports the median sales price while other sources use repeat sale 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 higher price and the other half sold for lower price. . . The challenge with the Median Sale Price TodayAs stated in the quotes above, different approaches can tell a different story. The median sales price today can tell a different story. As the quotes above say, the approaches can tell a different story. 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 worth ten cents. The value of each coin did not change. That’s why using median home prices as a gauge to see what’s going on with home values right now isn’t worth it. Most buyers use home prices to determine whether they are within their budget. Most people purchase homes based not only on the house price but also the monthly mortgage payment that they can afford. You may need to buy a cheaper home when mortgage rates are high to keep your housing costs affordable. This is the reason why a greater number of less-expensive houses are being sold right now, which is causing a decline in the median price. This does not mean that any house has lost value. Remember the coins when you hear stories about prices falling in the media later this week. It doesn’t necessarily mean that home prices are dropping just because the median price changes. What it means is that affordability and current mortgage interest rates are affecting the mix of homes sold.
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