In the dynamic world of real estate, interpreting home price trends can be perplexing. While some reports suggest rising prices, others claim a decline. This article aims to shed light on the seemingly contradictory information by examining the significance of the median home price and its limitations. By understanding the varying methodologies used in determining home prices, readers can gain a more accurate understanding of the current market landscape.
The Significance of the Median Sales Price
National Association of Realtors' Existing Home Sales (EHS) Report The National Association of Realtors releases the monthly EHS report, which provides insights into sales volume and price trends for pre-owned homes. While the upcoming release may indicate falling home prices, it contradicts other reports suggesting a positive trend. The reason lies in the different methodologies employed by various sources.
Explaining the Median Price vs. Repeat Sales Approach
The Center for Real Estate Studies at Wichita State University defines the median sales price as the midpoint value of homes sold, with half of the homes selling for a higher price and the other half for a lower price. On the other hand, the repeat sales approach calculates price changes based on the sales of the same property, eliminating the challenge of accounting for differences in home characteristics.
The Challenge with Relying on Median Sales Price
Contradicting Stories The varying methodologies employed by different reports can lead to contradictory narratives. While median price data, such as the EHS report, may indicate declining prices, most repeat sales reports demonstrate an appreciation in prices.
The Distortion Effect
According to Bill McBride, author of the Calculated Risk blog, median prices are distorted by the mix of homes sold. In contrast, repeat sales indexes like Case-Shiller and FHFA offer more reliable measurements of home prices.
Understanding the Median Value Concept
To illustrate the limitations of relying solely on the median home price, consider a simple example. Imagine having three coins in your pocket—two nickels and one dime. When lined up in order of value, the median value is five cents. However, if you have two nickels and one dime instead, the median value becomes ten cents. The value of each coin remains unchanged, emphasizing that fluctuations in the median value do not necessarily indicate changes in individual property values.
Looking Beyond the Median Home Price
Considering Affordability and Mortgage Rates Most buyers assess home prices based on their budget and monthly mortgage payment affordability rather than the price alone. Higher mortgage rates may compel buyers to choose more affordable homes, leading to a higher number of "less-expensive" houses being sold. Consequently, this can cause a decline in the median price, despite individual property values remaining stable.
Understanding the Mix of Homes Sold
Fluctuations in the median home price are influenced by the composition of homes sold, affected by affordability and current mortgage rates. It is crucial to recognize that these changes in the mix of properties do not reflect a universal decline in home values.
In summary, to gain a comprehensive understanding of home price trends and reports, it is crucial to look beyond the limitations of the median home price. Relying solely on this metric can lead to misleading conclusions about the real estate market. With Anthony Spitaleri and his team's expertise in analyzing alternative methodologies, such as repeat sales indexes like Case-Shiller and FHFA, we can help you navigate the complexities of the current housing market. Don't hesitate to reach out and connect with us for an in-depth exploration of home price dynamics and make well-informed decisions based on reliable data and expert guidance.
