The National Association of Realtors (NAR) is set to release its latest Existing Home Sales (EHS) report soon, which provides information on the sales volume and price trends for previously owned homes. However, this report is likely to show a decline in home prices, which might be confusing for those who have been following other sources claiming that home prices have hit rock bottom and are on the rise again.
The discrepancy in price trends can be attributed to the different methodologies used by various reports. NAR's report focuses on the median sales price, while other sources rely on repeat sales prices. Understanding these approaches is crucial in comprehending the varying conclusions they may draw.
The Center for Real Estate Studies at Wichita State University explains that the median sale price represents the middle value of homes sold, with half of the homes selling at higher prices and the other half at lower prices. For instance, if there is an increase in the number of lower-priced homes sold, the median sale price would decline because the "middle" home in the dataset is now a lower-priced one, even if the value of each individual home is increasing.
On the other hand, repeat sales approaches calculate changes in home prices based on sales of the same property over time. This method avoids the challenge of accounting for price differences in homes with varying characteristics.
The issue with relying solely on the median sales price is that it can lead to different conclusions compared to repeat sales reports, which generally indicate rising prices. Bill McBride, author of the Calculated Risk blog, points out that median prices are influenced by the composition of the sales mix, while repeat sales indexes like Case-Shiller and FHFA are likely better for measuring prices accurately.
To illustrate the discrepancy further, let's consider a simple example of median value. Imagine you have three coins in your pocket: one nickel and two dimes. If you arrange them in ascending order, the median value is 10 cents (the middle coin). However, if you have two nickels and one dime, the median value becomes five cents. Despite the change in median value, the worth of each individual coin remains the same.
This analogy demonstrates why relying solely on the median home price to gauge changes in home values may not provide an accurate picture. While most buyers consider home prices to determine if they fit their budgets, the majority of people purchase homes based on the monthly mortgage payment they can afford, rather than solely focusing on the house's price. When mortgage rates rise, individuals may need to opt for a less expensive home to maintain an affordable monthly housing expense. Consequently, a higher number of "less expensive" houses are sold, leading to a decline in the median price. However, this does not indicate a devaluation of individual homes.
Therefore, when media reports suggest falling prices in the upcoming release, it is crucial to remember the coin analogy. A change in the median price does not necessarily mean a decline in home prices overall. Instead, it reflects the influence of factors such as affordability and current mortgage rates on the mix of homes being sold.
In conclusion, gaining a more comprehensive understanding of home price trends and reports requires consulting with a local real estate professional. Their expertise and insights can provide valuable context and help navigate the nuances of different methodologies and data sources. By relying on expert guidance, individuals can make more informed decisions regarding home purchases and sales in a dynamic real estate market.
