The National Association of Realtors (NAR) releases its Existing Home Sales Report every month. 

The information it contains on house prices can generate some confusion and even create some worrying headlines. 

This is because NAR presents the median sales price, while other real estate price indices record the sales prices of properties that have been sold more than once - this is what we call 'repeat sales prices‘. 

Most of these repeat sales indices show that prices are starting to appreciate again.

However, the average price reports being released may tell a different story, even though the data is the sameAnd that shouldn't be a problem. We just need to understand what each index shows and how to explain them. 

Here's why using the median house price as an indicator of what's happening to house values isn't ideal at the moment.

The repeat sales price index has the advantage of tracking the price changes of specific properties over time, which provides a more accurate view of property appreciation.

However, the median sales price is influenced by the 'composition' of houses sold in a given period, which can distort the perception of the trend in house prices

According to the Center for Real Estate Studies at Wichita State University:

"The median sale price measures the 'middle' of the price of homes sold, meaning that half of the homes were sold for a higher price and the other half for less. Although this is a good measure of the typical sale price, it is not very useful for measuring the price appreciation of a house, as it is affected by the 'composition' of the houses that were sold.

For example, if more lower-priced houses have been sold recently, the median sale price would fall (because the 'middle' house is now a lower-priced house), even though the value of each individual house is increasing."

People buy houses based on monthly mortgage paymentsand not the price of the house. In other words, they are looking for houses that fit into their monthly budget. 

When mortgage rates rise, they need to buy a cheaper house to keep their monthly outgoings affordable. More 'less expensive' houses are being sold nowwhich is causing the median price to fall. But that doesn't mean that any individual house has lost value.

Even NAR, an organization that reports on median prices, recognizes that there are limitations to what this type of data can show. 

NAR explains: 

"Changes in the composition of sales can distort the median price data."

For clarification, here is a simple explanation of the median value:

  • Suppose you have three coins in your pocket. Sort them in ascending order (from smallest to largest)..
  • If you have one five-cent coin and two ten-cent coins, the median value of the coins (the middle one) in your pocket is ten cents.
  • If you have two five-cent coins and one ten-cent coin, the median value of the coins in your pocket is now five cents.
  • In both cases, a five-cent coin is still worth five cents and a ten-cent coin is still worth ten cents. The value of each coin hasn't changed.

This is the nature of the median value - it is impacted by the composition of the sample we are analyzing, and does not necessarily represent a change in the individual value or size of the items in the sample. This also applies to the real estate market: median house prices can change based on the composition of houses soldand does not necessarily reflect a change in the value of individual homes.

Summary

Any doubts?

Now that you understand that price indices can be confusing when we don't understand their nature, we can help you understand the behavior of the real estate market and start considering investing in vacation homes in orlando. To take advantage of all the tips we've given you and to go even deeper, you can talk directly to our relationship agents. They are always happy to talk to you to answer any questions you may have about investing in Florida.

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