The National Association of Realtors (NAR) is scheduled to announce its latest existing home sales (EHS) study on the morning of tomorrow. This monthly report gives information about the number of deals and price trends for homes previously owned by the NAR. In the next release, we’ll see how the price process could be more apparent, particularly if you’ve been following the news and reading about how home prices are at the bottom but have since recovered.
Why would they say that the prices of homes are decreasing when other reports state they’re expected to rise? It is all dependent on the method of each. NAR provides information on the median home sales price, and other sources utilize the repeat sales price. This is how the two approaches differ.
The Center for Real Estate Studies at Wichita State University provides median sales prices such as this:
“The median price of sale is the median price of homes sold, which means that half of homes sold at a higher price, while the other half sold at a lower price . . . For instance that if a greater number of lower-cost homes were sold in recent times the median sale price will decrease (because it is the “middle” home is now priced lower) regardless of that value for each home is increasing.”
Investopedia helps explain what a “repeat sales” strategy is.:
“ 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 Median Sales Prices for Homes of Today
According to the above quotes, different methods can reveal other truths. This is why median home sales data (like EHS) may say prices are declining, but most repeated sales reports indicate that prices are rising again.
Bill McBride, Author of the Calculated Risk blog, puts the difference this way:
“ Median prices are distorted by the mix and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”
To clarify this, For a quick explanation of the median values ( see visual below). You carry three coins in your wallet. You decide to place them in order of their importance, between low and high. Suppose you’ve got a dime and a nickel; the average price (the center one) is 10 cents. The median value is currently five cents when you own two nickels and a dime.
In both cases, a nickel will be worth 5 cents, while a dime still has 10 cents. The value of each coin did not change.
That is why using the median prices as a metric of what’s happening to the value of homes could be confusing today. Many buyers consider the prices of homes as an indication of whether they are within their budgets. However, most buyers purchase homes about the amount of their mortgage each month that they can pay, not the cost of the home. If interest rates on mortgages increase, you might have to purchase a lower house to ensure that your monthly home expenses remain reasonable.
This is why a higher percentage of less expensive homes are currently selling – and this is making the median prices fall. However, that doesn’t mean that every house has lost value.
When you read in the press that claims prices are falling in the coming week remember the dollars. If the median price of homes sold fluctuates, it does not mean home prices are dropping. This means that the affordability and current mortgage interest rates influence the variety of homes sold.