Why the Median Home Price Is Meaningless in Todays Market

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TheNational Association of Realtors(NAR) will release its latestExisting Home Sales(EHS) report later this week. This monthly report provides information on the sales volume and price trend for previously owned homes. In the upcoming release, itll likely sayhome pricesare down. This may feel a bit confusing, especially if youve been following along and seeing the blogs saying that home prices have bottomed out andturned a corner.

So, why will this likely sayhome pricesare falling when so many other price reports say theyre going back up? It all depends on the methodology of each report. NAR reports on themedian sales price, while some other sources userepeat sales prices. Heres how those approaches differ.

TheCenter for Real Estate StudiesatWichita State Universityexplainsmedian 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.

Investopediahelps define what a repeat sales approachmeans:

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. Thats why median price data (like EHS) may say prices are down, even though the vast majority of the repeat sales reports show prices areappreciating again.

Bill McBride, Author of theCalculated Riskblog,sumsthe 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.

To drive this point home, heres a simple explanation of median value (see visual below). Lets 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 didnt change.

Thats why using the median home price as a gauge of whats happening with home values isnt worthwhile right now. Most buyers look at home prices as a starting point to determine if they match their budgets. But, mostpeople buy homes based on the monthly mortgage payment they can afford, not justthe price of the house. Whenmortgage ratesare 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 thats causing the median price to decline.But that doesnt 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 doesnt mean home prices are falling. What it means is the mix of homes being sold is being impacted byaffordabilityand currentmortgage rates.