Tomorrow, the National Association of Realtors (NAR) will release its Existing Home Sales Report, which may lead to some confusion and potentially troubling headlines regarding home prices. The reason for this lies in the fact that NAR reports the median sales price, while other home price indices focus on repeat sales prices. While most repeat sales indices indicate an appreciation in prices, the median price reported by NAR might present a different narrative.
To comprehend why relying on the median home price as an indicator of home value isn’t ideal at the moment, let’s consider insights from the Center for Real Estate Studies at Wichita State University:
The median sale price represents the middle price of homes that were sold, meaning half of the homes sold for a higher price and half for a lower price. While this measure is useful for understanding typical sale prices, it isn’t effective for measuring home price appreciation because it is influenced by the composition of the homes sold.
For instance, if more lower-priced homes have been sold recently, the median sale price would decline (as the “middle” home becomes a lower-priced one), even if the value of each individual home is increasing.
Homebuyers make purchasing decisions based on their monthly mortgage payment, not solely on the price of the house. When mortgage rates rise, buyers may opt for less expensive homes to maintain an affordable monthly expense. Currently, more “less-expensive” houses are being sold, leading to a decline in the median price. However, this doesn’t imply that any individual house has lost value.
Even NAR, an organization that reports on median prices, recognizes the limitations of this type of data. NAR explains that changes in the composition of sales can distort median price data.
To clarify further, let’s provide a simple illustration of median value:
Imagine having three coins in your pocket and lining them up 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 remains worth five cents, and a dime remains worth ten cents. The value of each coin hasn’t changed.
The same principle applies to today’s real estate market.
In conclusion, actual home values are generally increasing in most markets, but the median value reported tomorrow may present a different story. For a more comprehensive understanding of home price trends, let’s connect to discuss the intricacies further.