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. The upcoming release will likely state that home prices are down.
This may not seem very clear, especially if you’ve been following along and seeing the blogs claiming 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 the median sales price, while 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 most 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.”
Here’s a simple explanation of the 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. The median value is now five cents if you have two nickels and one dime.
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 to gauge 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 expenses affordable. A more significant number of ‘less-expensive’ houses are selling right now for this exact reason, 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 that the mix of homes being sold is impacted by affordability and current mortgage rates.
Bottom Line
Contact our real estate agents near you at KM Realty Group LLC in Chicago for a more in-depth understanding of home price trends and reports.
