Home Prices Aren’t as they Seem
Median vs. Average Home Sales Price are often intermixed when describing the housing market. Understand the difference when digesting these key housing indicators. The National Association of Realtors (NAR) released a report June 22, 2023 stating that Existing-home sales recorded a minor gain of 0.2% in May to a seasonally adjusted annual rate of 4.30 million. Sales retreated 20.4% from one year ago. This monthly report provides information on the sales volume and price trend for previously owned homes. In the release, it’ll says home prices are only up slightly. This may feel confusing, especially if you’ve been following along and seeing the blogs saying that home prices have bottomed out and turned a corner.
So, why will this likely say home prices are falling or up just slightly when other price reports say they’re going back up? It depends on the methodology and how Median vs. Average Sales Price is used in each report. NAR reports on the median sales price, while some other sources use repeat sales prices. Here’s how those approaches differ.
What does Median vs. Average Price mean?
The Center for Real Estate Studies at Wichita State University explains median prices like this:
“The median sale price measures the ‘middle’ price of homes that sold, meaning that half of the homes sold for a higher price and half sold for less . . . For example, if more lower-priced homes have sold recently, the median sale price would decline (because the “middle” home is now a lower-priced home), even if the value of each individual home 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 homes 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. So you need to be careful when looking at Median vs. Average Sales Price!
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.”
Median vs. Average Sales Price still confusing? Here is 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 to 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.
Monthly Mortgage Payments Influence Rising Influence
That’s why using the median home price as a gauge of what’s happening with home values isn’t worthwhile right now. But Median vs. Average Sales Price is still important! Most buyers look at home prices as a starting point to determine if they match their budgets. But, most people buy homes based on the monthly mortgage payment they can afford, not just the price of the house. When mortgage rates are higher, you may have to buy a less expensive home to keep your monthly housing expense affordable. A greater number of ‘less-expensive’ houses are selling right now for this exact reason, and that’s causing the median price to decline. But that doesn’t mean any single house 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 home prices are falling. What it means is the mix of homes being sold is being impacted by affordability and current mortgage rates.
Get More Information
Median vs. Average Sales Price are critical indicators and can be nuanced. For a more in-depth understanding of home price trends and reports, reach out to me right away to help you understand the trends in your neighborhood.
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