The National Association of Realtors (NAR) will release its latest report on the sales of previously owned homes tomorrow. This report comes out every month and tells us how many homes were sold and if their prices went up or down. In the next report, it will probably show that home prices have gone down. This might be confusing because you might have read blogs saying that home prices hit the lowest point and then went up again.
So, why does this report say home prices are falling when other reports say they’re rising? It’s because they use different methods to calculate the prices. NAR looks at the middle price of homes sold, while some other sources look at prices of homes that were sold more than once. Let me explain how these methods are different.
According to the Center for Real Estate Studies at Wichita State University, the median sale price represents the middle price among homes that were sold. This means that half of the homes sold for a higher price, and the other half sold for a lower price.
For instance, if more lower-priced homes have been sold recently, the median sale price would decrease because the “middle” home now has a lower price, even if each individual home is increasing in value.
Investopedia provides an explanation of the repeat sales approach as follows: “Repeat-sales methods determine how home prices change by looking at the sales of the same property when it’s sold again. This avoids the challenge of having to consider price differences in homes with different features.”
The Challenge with the Median Home Sales Price Today
The quotes above highlight that different methods can lead to different outcomes. This is why data on median home sales prices, like the Existing Home Sales (EHS) report, may suggest that prices are going down, even though most repeat sales reports indicate that prices are rising again.
Bill McBride, who writes the Calculated Risk blog, simplifies this by saying: “Median prices can be affected by the types of homes being sold, and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”
To make this idea even easier to understand, consider a simple example with coins. Imagine you have three coins in your pocket, and you arrange them from the lowest value to the highest. If you have one nickel and two dimes, the middle value (the median) is 10 cents. But if you have two nickels and one dime, the median value becomes 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 hasn’t changed.
This is why using the median home sales price to judge what’s happening with home values might be confusing right now. Most buyers use home prices as a starting point to see if they fit within their budgets. However, most people buy homes based on what they can afford in terms of their monthly mortgage payments, not just the initial price of the house. When mortgage rates are higher, you may need to purchase a less expensive home to make your monthly housing costs manageable.
That’s why more “affordable” houses are selling right now, which is causing the median home sales price to go down. But this doesn’t mean that any individual house has lost its value.
So, when you hear reports in the media saying that prices are dropping this week, remember the coin example. Just because the median home sales price changes doesn’t mean that home prices are actually decreasing. What it signifies is that the types of homes being sold are being influenced by affordability and current mortgage rates.
Bottom Line
If you’re interested in gaining a more comprehensive understanding of home price trends and reports, We are here to offer additional information and address any specific inquiries you may have. Feel free to ask anything you’re curious about, and we’ll do my best to assist you.
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Tue, 05 Sep 2023 20:46:49 +0000
