Understanding the Nuances of Home Price Reports: Looking Beyond the Median

The National Association of Realtors (NAR) is set to release its latest Existing Home Sales Report, which is expected to provide valuable insights into the housing market. However, interpreting the information accurately is crucial, especially when it comes to home prices. The NAR primarily relies on the median sales price, which may not paint a comprehensive picture of the market's health. This blog aims to delve deeper into the intricacies of using the median price as a gauge for home values and emphasize the importance of considering alternative metrics.

To comprehend why the median home price may not be ideal for evaluating home price appreciation, we turn to the Center for Real Estate Studies at Wichita State University. The median sale price represents the middle value of homes sold, indicating that half of the homes fetched a higher price while the other half sold for less. While this metric can serve as a good measure of the typical sale price, it falls short in reflecting accurate home price appreciation due to its susceptibility to the composition of homes that have been sold.

Consider a scenario where a higher number of lower-priced homes were recently sold. In such a case, the median sale price would decline, as the "middle" home now belongs to the lower-priced segment. However, this does not imply that any individual house has lost value. The real estate market relies on the affordability of monthly mortgage payments, which prompts buyers to opt for less expensive homes when mortgage rates increase. Consequently, an increased demand for "less-expensive" houses currently drives the decline in median prices.

Even the NAR, an organization that reports median prices, acknowledges the limitations of this data. NAR explains that changes in the composition of sales can distort median price data, reinforcing the idea that the median alone may not provide a complete picture of the housing market.

To illustrate this concept, let's consider a simple example using coins. Imagine you have three coins in your pocket: one nickel and two dimes. When arranged in ascending order, the median value (the middle coin) would be ten cents. Now, if you were to replace one dime with two nickels, the median value would become five cents. However, the value of each individual coin—five cents for a nickel and ten cents for a dime—remains unchanged. Similarly, in today's real estate market, the decline in the median price doesn't indicate a loss of value for any specific property.

While the NAR's upcoming release of the median sales price is noteworthy, it is crucial to recognize the limitations of this metric when assessing home values. Instead, a comprehensive understanding of home price movements requires considering alternative indices, such as repeat sales prices. By reaching out to a local real estate professional, individuals can gain a more in-depth perspective on the dynamics of their specific market.

It is imperative that we look beyond the headline figures and dig deeper into the underlying factors influencing median prices. By doing so, we can gain a more accurate assessment of the current state of the real estate market and make informed decisions based on reliable data.