By Virginia Wright, posted June 25, 2023

The National Association of Realtors (NAR) is set to release its latest Existing Home Sales (EHS) report soon, which provides valuable insights into the sales volume and price trends of previously owned homes. This upcoming report is expected to indicate a decline in home prices, which might seem contradictory given the prevailing narrative of home prices rebounding.

The reason for this apparent discrepancy lies in the methodology used by different reports. NAR's report focuses on the median sales price, whereas other sources employ repeat sales prices. Understanding the distinction between these approaches is crucial.

The Center for Real Estate Studies at Wichita State University defines the median sales price as the middle value, where half of the homes sold for a higher price and the other half for a lower price. Consequently, if a greater number of lower-priced homes were recently sold, the median sale price would decline, even if the value of each individual home is actually increasing.

On the other hand, the repeat sales approach, as explained by Investopedia, calculates changes in home prices based on the sales of the same property. This method avoids the challenge of accounting for price differences due to varying property characteristics.

Hence, while median price data, such as the EHS report, may indicate falling prices, the majority of repeat sales reports consistently demonstrate appreciating prices.

Bill McBride, the author of the Calculated Risk blog, succinctly summarizes the difference between the two approaches, stating that the mix of homes sold can distort median prices. At the same time, repeating sales indexes like Case-Shiller and FHFA provide more reliable measurements of prices.

To illustrate this point further, consider a simple example of three coins. If you arrange them in order of value, from lowest to highest, with one nickel and two dimes, the median value is 10 cents. However, if you have two nickels and one dime, the median value becomes five cents. In both cases, the value of each coin remains the same.

Therefore, relying on the median home price as an indicator of changes in home values is not particularly useful at present. Most buyers assess home prices as a starting point to determine affordability based on their monthly mortgage payments, not solely the house price. When mortgage rates rise, buyers may need to purchase less expensive homes to maintain affordable monthly housing expenses. Consequently, a higher number of "less-expensive" houses are being sold, leading to a decline in the median price. However, this does not imply a decrease in the value of individual homes.

So, when you come across media stories reporting falling prices based on the upcoming NAR report, keep in mind the analogy of the coins. Fluctuations in the median price do not necessarily indicate a decline in home prices. Instead, they reflect the impact of affordability and current mortgage rates on the mix of homes being sold.

 (Disclosure: I am not an attorney.  The information presented here is not to be construed as legal advice. If you are unsure whether to disclose certain situations, you should seek legal counsel).