July 21, 2023 In Real Estate, Videos

False Signals: The Deceptive Nature of Median Sales Prices



Explaining the discrepancies in pricing trend reports in the market.

In today’s real estate market, the median home price may not accurately reflect the overall pricing trend. Today I’ll explain why this is the case.

Later this week, the National Association of Realtors will release its existing home sales report, which will provide information on sales volume and price trends for previously owned homes. It will likely state that home prices are down, which might be confusing if you’ve been following the news reporting that home prices have bottomed out and are starting to appreciate again.

This discrepancy in reports arises from different methodologies. Some reports rely on the median sales price, while others use repeat sales prices. The median sales price represents the middle price of homes sold, with half selling for a higher price and half for less. For example, if lower-priced homes have sold more recently, the median sales price would decline, even if individual home values continue to rise. On the other hand, the repeat sales approach calculates price changes based on sales of the same property, avoiding the issue of price differences in homes with varying characteristics.

Thus, median price data might suggest prices are down, while repeat sales reports show prices appreciating. Median prices can be distorted by the mix of homes within them, making repeat sales indexes a better measure for pricing. To illustrate, consider having three coins in your pocket and lining them up by value from low to high. If you have one nickel and two dimes, the median value would be $0.10. If you had two nickels and one dime, the median value would be $0.05. In both cases, a nickel is still worth $0.05, and a dime is still worth $0.10. The value of each coin didn’t change. Therefore, using median home pricing to gauge home values isn’t very meaningful.

“Repeat sales indexes are a better measure for pricing.”

Most buyers today look at home prices as a starting point to determine if the house fits their budget. They consider the monthly affordability of the mortgage payment, not just the house’s price. When mortgage rates are higher, buyers may need to consider a less expensive home to afford their monthly housing expenses, leading to a decline in median home pricing. However, this doesn’t mean any single house lost value.

When media stories report falling prices, it’s essential to remember the coin analogy. A change in the median price doesn’t indicate falling home prices but rather reflects the mix of homes being sold, influenced by affordability and current mortgage rates, with certain price points selling more frequently.

For a deeper understanding of home prices, trends, and the real estate market in Charleston, South Carolina, reach out to any of our expert home advisers at the Dave Friedman Team. You can call or email us anytime and we would be happy to hear from you!

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