Why the Median Home Sales Price Can Be Misleading


The real estate market is a complex entity, and understanding its dynamics requires a keen eye for data interpretation. If you've been puzzled by recent headlines claiming a decline in home prices despite hearing about a rebound, you're not alone. The truth lies in the nuances of different methodologies used to assess these trends.


The Upcoming Existing Home Sales (EHS) Report

Tomorrow, the National Association of Realtors (NAR) will release its latest Existing Home Sales report, shedding light on the volume of sales and price trends for pre-owned homes. However, this report might diverge from other price assessments, causing confusion among observers. Here's why.


Median Home Sales Price vs. Repeat Sales Approach

The divergence in price reports stems from the use of distinct methodologies. The NAR's EHS report focuses on the median home sales price, while other sources employ a repeat sales approach. Let's delve into the differences.

Median Sales Price

The median sale price represents the middle price point of homes sold. If more lower-priced homes sell, the median price may decrease, even if individual home values are rising.


Repeat Sales Approach

This approach calculates price changes based on the sales of the same property over time, thereby avoiding discrepancies due to property characteristics.



Decoding the Data Challenge

The contrasting methodologies can yield conflicting narratives. While median home sales price data might suggest a decrease, most repeat sales reports indicate a positive appreciation in home prices.


Bill McBride, author of the Calculated Risk blog, aptly sums up the situation:

"Median prices are distorted by the mix and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices."


To simplify this distinction, consider three coins in your pocket: two nickels and a dime. If you arrange them by value, the median value is 5 cents. Replace one nickel with another dime, and the median becomes 10 cents. However, the value of each coin remains unchanged. Similarly, the mix of homes being sold affects the median price, but not necessarily individual home values.


Unveiling the True Story

Home prices play a pivotal role in the home buying process, but they're not the sole determining factor. Affordability and mortgage rates significantly impact the type of homes being sold and consequently the median price. People purchase homes based on their monthly mortgage payment affordability, not solely on the house price. When mortgage rates are high, more 'affordable' homes might dominate the market, causing the median price to dip. However, individual home values may not have decreased.



Finding Clarity in Complex Data

So, when you encounter headlines about falling home prices, remember the coin analogy. The change in the median home sales price doesn't indicate a universal decline in home values; rather, it reflects the mix of homes sold due to changing market dynamics.


For a comprehensive understanding of home price trends and a clearer perspective on your real estate decisions, connect with us. We're here to help you navigate the intricate world of real estate data.