Why the Median Home Price Is Meaningless in Today's Market

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Diving into the world of real estate, you're bound to come across complex terminologies and sometimes conflicting market trends. Have you ever found yourself puzzled by terms such as "median home price" or "existing home sales"? Or wondered why some reports claim that home prices are falling while others argue they're on the rise? Well, you're not alone. Let's simplify and dissect this complex web.

The National Association of Realtors (NAR) periodically releases a report known as the Existing Home Sales (EHS) report. This report unveils the latest trends and data related to previously owned home sales, offering a snapshot of the real estate landscape.

According to the grapevine, the forthcoming EHS report will showcase a dip in home prices. Baffling, right? Especially when numerous blogs have been suggesting that home prices have bottomed out and are now swinging upwards.

This confusion arises from the methodology employed in these reports. The NAR emphasizes the median sales price. As the Wichita State University’s Center for Real Estate Studies explains, the median sale price is the 'middle' price of homes sold. Half of the homes are priced above the median, while half fall below it. Shifts in the kind of homes sold can cause the median price to fluctuate, even if individual home values are rising.

On the flip side, there are reports that use a "repeat sales" approach. Investopedia describes this method as calculating home price changes based on sales of the same property over time, bypassing issues related to price differences in homes with various characteristics.

Consequently, it's possible for median price data (like the EHS) to portray a decrease in prices while most repeat sales reports are indicating appreciation.

Bill McBride, a renowned author of the Calculated Risk blog, succinctly expresses this difference: “Median prices are distorted by the mix, and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”

Consider this: you have three coins - one nickel and two dimes. If you arrange them according to their value, the median value is 10 cents (a dime). However, if you had two nickels and one dime, the median value would drop to five cents. Yet, the value of each coin remains the same.

This analogy precisely captures why using the median home price as a gauge for home values can lead to misleading interpretations. The majority of homebuyers start their search by matching home prices with their budgets. Yet, they finalize a purchase based on what monthly mortgage payment they can afford, not merely the price of the house.

Higher mortgage rates mean buying a less expensive home to keep the monthly housing expense within the affordable range. This leads to a greater number of 'less-expensive' houses being sold, causing the median price to decrease. But this doesn't imply that the value of individual houses has dropped.

When you see headlines declaring that home prices are plummeting, remember our coin analogy. A change in the median price doesn't necessarily signify a drop in home prices. It merely reflects changes in the mix of homes being sold, influenced by factors such as affordability and prevailing mortgage rates. By understanding this, you can interpret market trends more accurately and make informed decisions about your property transactions.

Bottom Line

The real estate market is more complex than it might seem at first glance. To gain a profound understanding of home price trends and reports, it's best to consult a local real estate professional.

In Prescott, Arizona, for instance, you could reach out to Michael Eastwood, CEO of West USA Realty of Prescott. Dial 928-636-1500 or visit www.westusaofprescott.com he will introduce you to one of his professional real estate agents.#RealEstateTips, #PrescottAZ, #HashtagPower, #BoostYourPosts, #ViralContent, #RealEstateSuccess, #RealEstateReel, #PrescottAZ, #HashtagHacks, #InstagramGrowth, #ViralVisibility, #FollowMe, #PrescottRealEstate, #ArizonaHomes, #PrescottAZ, #RealEstateForSale  

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