Real estate professionals and economists alike are looking forward to the newest Existing Home Sales Report from the National Association of Realtors (NAR). While many other home price indices point toward an appreciation in prices, the report will provide much-needed context due to its use of median sales price, rather than repeat sales prices. This could cause some confusion and contentious headlines; however, it will also give a more accurate view of home prices across the nation.
Here’s why using the median home price as a gauge of what’s happening with home values isn’t ideal right now. According to the Center for Real Estate Studies at Wichita State University:
The median sale price measures the ‘middle’ price of homes that sold, meaning that half og the homes sold for a higher price and half sold for less. While this is a good measure of the typical sale price, it is not very useful for measuring home price appreciation because it is affected by the ‘composition’ of homes that have sold. For example, if more lower-priced homes have sold recently, the median sale price would decline (because the “middle” home is now a lower-prced home), even if the value of each individual home is rising.
The price of a home is determined by the monthly mortgage payment, rather than the overall cost. When interest rates increase, individuals must opt for more affordable homes, causing the median house price to decrease. Despite this drop in collective cost, individual homes do not necessarily experience a loss in value.
Even NAR, an organization that reports on median prices, acknowledges there are limitations to what this type of data can show you. NAR explains:
Changes in the composition of sales can distort median price data.
- For clarification, here’s a simple explanation of the median value:
- You have three coins in your pocket. Line them up in ascending value (lowest to highest).
- If you have one nickel and two dimes, the median value of the coins (the middle one) in your pocket is ten cents.
- If you have two nickels and one dime, the median value of the coins in your pocket is now five cents.
- In both cases, a nickel is still worth five cents and a dime is still worth ten cents. The value of each coin didn’t change.
The same thing applies to today’s real estate market.
What We Say…
Actual home values are going up in most markets. The median value reported tomorrow might tell a different story. For a more in-depth understanding of home price movements, let’s connect! Email us at Debbie@SandiandDebbieHomes.com.
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