Looking Beyond the Median Home Price

The National Association of Realtors (NAR) released the latest Existing Home Sales report this week. It offers insights into the sales volume and price trends of previously owned homes. While the monthly data in the report indicates a slight uptick, the year-over-year figures reveal a decline, which might seem perplexing given the prevailing narrative that prices have hit bottom and are rebounding. The reason for this seeming contradiction is that different reports use different methods to calculate home prices. The National Association of Realtors (NAR) focuses on the median sales price, while other sources use a repeat sales approach. It's important to note the difference between these methods.

In real estate, the concept of median prices is used to determine the middle value of a set of sale prices for properties in a specific area during a certain period. It represents the point at which half of the properties sold at a higher price and half sold at a lower price. For instance, even if individual home values increase, the median sale price will drop if more inexpensive houses recently sell because the value in the middle will also drop.

To illustrate, imagine you have a collection of marbles. Arrange them in order of size, from the smallest to the largest. If you have one small marble and two medium-sized marbles, the median size would be the size of the medium marble. However, if you have two small marbles and one medium-sized marble, the median size would be the size of the small marble.

On the other hand, a repeat sales approach, as defined by Investopedia, calculates changes in home prices based on sales of the same property, thereby avoiding the challenge of accounting for price differences in homes with varying characteristics.

Consequently, the use of the median price as a data point, such as in the EHS report, can indicate a decline in prices, even though the majority of repeat sales reports suggest an appreciation in prices once again. Bill McBride, known for his blog Calculated Risk, provides a concise explanation of this differentiation, expressing that a variety of homes sold can affect median prices, but repeat sales-based indexes like Case-Shiller and FHFA are probably more accurate at predicting price trends.

Relying on the median home price as an indicator of changes in home values is currently ineffective. Most buyers consider home prices as a starting point to assess affordability. However, their purchase decisions are primarily driven by the monthly mortgage payment they can afford rather than just the price of the house. When mortgage rates are higher, buyers may need to opt for a less expensive home to ensure their monthly housing costs remain affordable. The current market conditions reflect a higher proportion of sales in the "less-expensive" category due to these affordability constraints, leading to a drop in the median price. However, this does not imply that any individual property has lost value.

Therefore, when media reports indicate falling prices, remember that changes in the median price do not necessarily signify a decline in home prices. Instead, they suggest that variables like affordability and current mortgage rates have an impact on the make-up of homes that are for sale.

Beyond the median home price, it is crucial to consider other factors when assessing the real estate market. Firstly, evaluating the location of the property, including proximity to amenities and future growth potential, provides valuable insights. Additionally, analyzing market conditions such as inventory levels and days on market, along with considering the property's condition and features, can help make informed decisions. Finally, factoring in financing terms and affordability ensures a comprehensive assessment of the market, enabling buyers and investors to align their choices with their specific needs and goals. It is best to consult with a local real estate agent who can provide valuable insights for a fuller grasp of the trends in home prices and reports in your local market.