Imminent is the day when the National Association of Realtors (NAR) graces us with its freshest Existing Home Sales Report. The data therein concerning house prices might engender ambiguity, possibly provoking alarming headlines. The heart of the commotion emanates from the fact that NAR will unveil the median sales price, while other home price indices consider repeat sales prices. An overwhelming majority of repeat sales indices are signaling that prices are on an upward trend again. However, the median price set to be disclosed may depict an alternate tale.
The utilization of the median home price as an indicator of home value trends might not be the optimal approach currently. The Center for Real Estate Studies at Wichita State University elaborates:
The median sale price epitomizes the ‘central’ price of homes sold, implying half of the homes fetched a higher price while the remaining half commanded less. Although this is an accurate representation of the typical sale price, it is less effective when measuring home price appreciation as it is influenced by the ‘assortment’ of homes sold. For instance, if recently, homes at the lower end of the price spectrum have seen more sales, the median sale price would inevitably decline (since the ‘central’ home is now a lower-priced one), even though the value of each individual home might be experiencing an upswing.
Individuals usually purchase homes anchored on their monthly mortgage payments, not the overarching price of the house. An uptick in mortgage rates forces them to opt for less expensive homes to keep monthly expenditures within an acceptable range. Presently, there is a predominance of ‘less-expensive’ houses being sold, resulting in a reduction of the median price. However, it doesn’t necessarily imply that any single home has lost value.
Even NAR, the organization that regularly reports median prices, concedes that there are inherent limitations in the degree of insight this type of data can provide. NAR clarifies:
Shifts in the composition of sales can introduce anomalies into median price data.
For simplicity, here’s an analogy explaining median value:
You possess three coins in your pocket, arranged in an ascending order of value. If you have one nickel and two dimes, the median value of your coins (the central one) is ten cents. However, if you have two nickels and a dime, the median value of the coins reduces to five cents. In both scenarios, a nickel retains its worth of five cents, and a dime is still valued at ten cents. The value of each coin remains unchanged. A similar principle applies to today’s real estate market.
Conclusion:
The intrinsic values of homes are escalating in most markets, contrary to what the median value reported tomorrow might suggest. For a more nuanced understanding of home price movements, let’s establish a connection.
Tom Dudzinski, Designated Managing Broker
Illinois Star, Ltd. REALTORS®
847-647-4000
IllinoisStarRealtors.com