The National Association of Realtors (NAR) will release its latest Existing Housz Sales (EHS) report later this week. This monthly report provides information on the sales volume and price trend for previously owned houszes. In the upcoming release, it’ll likely say housz prices are down. This may feel a bit confusing, especially if you’ve been following along and seeing the blogs saying that housz prices have bottomed out and turned a corner.
So, why will this likely say housz 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 on the median sales price, while some 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 houszes that sold, meaning that half of the houszes sold for a higher price and half sold for less . . . For example, if more lower-priced houszes have sold recently, the median sale price would decline (because the “middle” housz is now a lower-priced housz), even if the value of each individual housz 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 houszes 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 the vast majority of the 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 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 too high. If you have one nickel and two dimes, the median value (the middle one) is 10 cents. If you have two nickels and one dime, the median value is now 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 didn’t change.
That’s why using the median housz price as a gauge of what’s happening with housz values isn’t worthwhile right now. Most buyers look at housz prices as a starting point to determine if they match their budgets. But, most people buy houszes based on the monthly mortgage payment they can afford, not just the price of the housz. When mortgage rates are higher, you may have to buy a less expensive housz to keep your monthly housing expense affordable. A greater number of ‘less-expensive’ houszes are selling right now for this exact reason, and that’s causing the median price to decline. But that doesn’t mean any single housz 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 housz prices are falling. What it means is the mix of houszes being sold is being impacted by affordability and current mortgage rates.
Bottom Line
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