Article Courtesy of Keeping Current Matters/The KCM Blog
The National Association of Realtors (NAR) will release its latest Existing Home Sales (EHS)
report later this week. This monthly report provides information on the
sales volume and price trend for previously owned homes. In the
upcoming release, it’ll likely say home prices
are down. This may feel a bit confusing, especially if you’ve been
following along and seeing the blogs saying that home prices have
bottomed out and turned a corner.
So, why will this likely say home prices
are falling when so many other price reports say they’re going back up?
It all depends on the methodology of each report. NAR reports on the median sales price, while some other sources use repeat sales prices. Here’s how those approaches differ.
The Center for Real Estate Studies at Wichita State University explains median prices like this:
“The median sale price measures the
‘middle’ price of homes that sold, meaning that half of the homes sold
for a higher price and half sold for less . . . For
example, if more lower-priced homes have sold recently, the median sale
price would decline (because the “middle” home is now a lower-priced
home), even if the value of each individual home is rising.”
Investopedia helps define what a repeat sales approach means:
“Repeat-sales methods calculate changes in home prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics.”
The Challenge with the Median Sales Price Today
As the quotes above say, the approaches can tell different stories.
That’s why median price data (like EHS) may say prices are down, even
though the vast majority of the repeat sales reports show prices are appreciating again.
Bill McBride, Author of the Calculated Risk blog, sums the difference up like this:
“Median prices are distorted by the mix and repeat
sales indexes like Case-Shiller and FHFA are probably better for
measuring prices.”
To drive this point home, here’s a simple explanation of median value (see visual below).
Let’s say you have three coins in your pocket, and you decide to line
them up according to their value from low to high. If you have one
nickel and two dimes, the median value (the middle one) is 10 cents. If
you have two nickels and one dime, the median value is now five cents.
In both cases, a nickel is still worth five cents and a dime is still worth 10 cents. The value of each coin didn’t change.
That’s why using the median home price as a gauge of what’s happening
with home values isn’t worthwhile right now. Most buyers look at home
prices as a starting point to determine if they match their budgets.
But, most people buy homes based on the monthly mortgage payment they
can afford, not just the price of the house. When mortgage rates
are higher, you may have to buy a less expensive home to keep your
monthly housing expense affordable. A greater number of ‘less-expensive’
houses are selling right now for this exact reason, and that’s causing
the median price to decline. But that doesn’t mean any single house lost value.
When you see the stories in the media that prices are falling later
this week, remember the coins. Just because the median price changes, it
doesn’t mean home prices are falling. What it means is the mix of homes
being sold is being impacted by affordability and current mortgage rates.
