Why the Median Home Price is Meaningless in Today's Market
The National Association of Realtors (NAR) will release its latest Existing 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, it'll likely say home prices are down. This may feel a bit 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 when so many other price reports say they're going back up? It all depends on the methodology of each report. NAR reports on the median sales price, while some other sources repeat sales prices. Here's how those approaches differ.
The Center for Real Estate Studies at Wichita State University explains median prices like this:
The median sale prices 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.
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.
To drive this point home, here's 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.