Why Median Home Sales Price Is Confusing Right Now

The National Association of Realtors (NAR) released its most recent Existing Home Sales (EHS) report yesterday. This monthly release provides up-to-date information on sales volume and price trends for previously owned homes. The release concluded that home prices are down. Does this change seem confusing? If you’ve been tracking the housing market, you’ve noticed several blogs saying home prices have hit bottom and since rebounded.

Why would this report say home prices are falling if numerous other price reports say the opposite? It all depends on the methodology used. NAR reports the median home sales price, while other sources use repeat sales prices. Here’s how those approaches differ:

The Center for Real Estate Studies at Wichita State University explains median sales 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.”

Need help understanding what a repeat sales approach means? Investopedia defines it this way:

“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 Home Sales Price Today

As we see above, the various approaches can lead to different or opposing conclusions. That’s why median home sales price data (like EHS) record that prices are down, even though most repeat sales reports show prices are appreciating again.

Bill McBride, Author of the Calculated Risk blog, explains this discrepancy:

“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 the median value (see visual below). Imagine you have three coins in your pocket. 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.

Using the median home sales price to gauge what’s happening with home values can be confusing. Homebuyers often look at home prices as a starting point to determine whether their budget matches the current market. However, many people don’t just buy homes based on the house price, but on the monthly mortgage payment they can afford. With higher mortgage rates, you may have to buy a less expensive home to keep your monthly housing expense affordable.

Due to this, the median home sales price is declining as more ‘less-expensive’ houses are selling. However, this does not mean any single house lost value!

Later this week, expect to see stories in the media indicating that prices are falling. Remember the coins.

Bottom Line

A change in the median home sales price does not indicate home prices are falling. It simply means that affordability and current mortgage rates are impacting the mix of homes currently being sold. The Just Say Home KC real estate experts are here to help you better understand the current Kansas City housing market trends and reports!