Los Angeles and Beverly Hills Median Sales Prices Demystified: Navigating Home Price Perceptions
Los Angeles and Beverly Hills Median Sales Prices Demystified: Navigating Home Price Perceptions | Christophe Choo at Coldwell Banker Global Luxury is Your Local Real Estate Expert.
Anticipation builds as the National Association of Realtors (NAR) gears up to unveil its latest Existing Home Sales (EHS) report tomorrow. A monthly beacon of insight, this report unveils sales volumes and price patterns of pre-owned homes. However, as the impending release hints at declining home prices, a curious discrepancy emerges. This bewilderment escalates if you've been keeping a watchful eye on the real estate dialogue, where claims of a market bottom and subsequent rebound have been frequent.
So, why do these imminent revelations contradict the prevailing notion of ascending home prices? The answer hinges on the intricate methodologies each report employs. While some sources herald the resurgence of prices, NAR bases its findings on the median home sales price. Conversely, other outlets rely on the repeat sales prices approach. Let's unravel the distinctions between these methods.
The Center for Real Estate Studies at Wichita State University distills the concept of median sales prices thusly:
"The median sale price captures the midpoint value of sold homes, signifying that half of the homes commanded higher prices and the remaining half, lower prices... If a surge in lower-priced homes recently sold, the median sale price would dip (owing to the 'middle' home now being a lower-priced one), even if individual home values are appreciating." Investopedia delves into the repeat sales approach:
"Repeat-sales methodologies compute price fluctuations by scrutinizing sales of the same property, obviating the challenge of accommodating price variations in homes with disparate attributes." Unraveling the Complexity Surrounding Median Home Sales Prices in Today's Market
As articulated by the aforementioned perspectives, these methodologies produce divergent narratives. Ergo, even as median home sales price data (as demonstrated in EHS) indicates a decline, the lion's share of repeat sales analyses exhibits a resurgence in prices.
Bill McBride, the mind behind the Calculated Risk blog, succinctly contrasts these approaches:
"Median prices undergo distortion due to compositional changes, while repeat sales indexes like Case-Shiller and FHFA perhaps offer superior measurements for assessing prices." Illustrating this divergence, let's employ a straightforward analogy of median value (visualize the diagram below). Envision having three coins nestled in your pocket, and your endeavor involves arranging them in order of value, from low to high. Suppose there's one nickel and two dimes; the median value (the middle coin) equates to 10 cents. Now, consider two nickels and one dime; the median value becomes five cents.
In both scenarios, the intrinsic value of a nickel remains at five cents, and a dime maintains its worth at 10 cents. The value of individual coins hasn't altered.
This analogy illuminates why relying on the median home sales price to gauge property value might perplex in the current context. Prospective buyers often scrutinize home prices to align with their budgets. However, the majority make purchases based on the monthly mortgage payments they can comfortably manage, not just the initial house price. When mortgage rates ascend, affordability might necessitate selecting a less expensive dwelling to sustain manageable monthly housing expenditures.
Consequently, a surge in sales of 'affordable' homes is witnessed, contributing to the decline in median home sales price. Yet, this doesn't indicate a depreciation in the value of any individual property.
So, as media narratives hint at forthcoming price dips, remember the coin analogy. Altered median home sales prices don't denote an overall decline in home values. Rather, they signal a shift in the blend of homes transacted, a response to factors such as affordability and current mortgage rates.
To fathom the nuanced trends and reports in the realm of home prices, let's engage in a more comprehensive dialogue. Furthermore, let's explore the intriguing interplay between these methodologies within the context of the vibrant real estate landscapes of Los Angeles and Beverly Hills, California.