Different Reports Can Tell Different Stories
You see a headline saying home prices are falling. Then you read another report saying prices have bottomed out and started rising. Which one should you believe?
Before choosing one, look at what each report measures. The difference may come down to methodology, not a disagreement about the same set of numbers.
The National Association of Realtors, or NAR, publishes its Existing Home Sales report each month. It provides information on sales volume and price trends for previously owned homes. For prices, NAR reports the median sales price.
Some other sources use repeat-sales prices. Those two approaches answer different questions. Understanding the difference can help you make sense of a headline without assuming it tells you what happened to the value of an individual home.
What the Median Sales Price Measures
The median is the middle price when the homes sold are arranged from lowest price to highest price. Half sold for more, and half sold for less.
The Center for Real Estate Studies at Wichita State University explains it this way:
“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.”
The important part is homes that sold. The median reflects that group of sales. Change the mix of homes in the group, and you can change the middle price.
That means a lower median does not, by itself, establish that individual homes lost value. It may mean that more lower-priced homes sold.
What Repeat-Sales Reports Measure
A repeat-sales approach looks at sales of the same property to calculate changes in home prices.
Investopedia defines the approach 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.”
Instead of focusing on the middle price of a changing group of homes, this approach follows price changes based on repeat sales of the same properties.
Bill McBride, author of the Calculated Risk blog, sums up the distinction:
“Median prices are distorted by the mix and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”
This explains how a median-price report can show a decline while many repeat-sales reports show appreciation. The median can move down because of the sales mix, even as repeat-sales measures point to rising home values.
A Simple Example: Remember the Coins
You do not need a stack of housing reports to understand this distinction. Three coins will do.
One Nickel and Two Dimes
Imagine you have one nickel and two dimes. Line them up from lowest value to highest:
- Five cents
- Ten cents
- Ten cents
The middle coin is a dime, so the median value is 10 cents.
Two Nickels and One Dime
Now imagine you have two nickels and one dime. Put them in the same order:
- Five cents
- Five cents
- Ten cents
The middle coin is now a nickel, so the median value is five cents.
The median fell, but none of the coins lost value. A nickel is still worth five cents. A dime is still worth 10 cents.
The mix changed. The value of each coin did not. That is the point to remember when you read about a falling median home price.
How Mortgage Affordability Changes the Mix
Most buyers look at a home's price as a starting point for deciding whether it fits their budget. But most people buy based on the monthly mortgage payment they can afford, not just the purchase price.
When mortgage rates are higher, a buyer may need to choose a less expensive home to keep the monthly housing expense affordable.
When more buyers make that adjustment, a greater number of less expensive homes can sell. That shift can pull the median sales price down.
Here is the connection in plain English:
- Higher mortgage rates can affect the monthly payment a buyer can afford.
- The buyer may need to look at a lower-priced home.
- More sales of lower-priced homes can change the overall sales mix.
- That different mix can produce a lower median sales price.
None of those steps means that any particular home necessarily lost value. Like the coins, the middle number can change because the group being measured changed.
How to Read a Home Price Headline
A headline about falling prices deserves a closer look before you apply it to your own buying or selling plans. Start with these questions.
Is the Report Measuring Median or Repeat-Sales Prices?
Look for the method behind the number. A median-price report describes the middle price of homes sold. A repeat-sales report calculates price changes based on sales of the same property.
Could the Mix of Homes Sold Explain the Change?
If more lower-priced homes sold, the median can decline without individual homes losing value. Remember the nickels and dimes before treating the median as a direct measure of appreciation or depreciation.
What Does Your Monthly Budget Allow?
If you are buying, keep the monthly payment in the conversation. A purchase price is a starting point, but the payment you can afford is central to deciding which homes fit your budget.
The Bottom Line
The median sales price tells you the middle price of the homes that sold. It does not, on its own, tell you whether an individual home's value rose or fell.
For a deeper understanding of home price trends, talk with a local real estate professional. Bring the report or headline that raised your question, and ask what it measures.
If you are planning a purchase, write down the monthly housing payment you feel comfortable with. Then reach out to Ed Parcaut to discuss your mortgage questions and how price and payment fit into your plans.
