Understanding Home Price Reports: Looking Beyond the Median in Today’s Real Estate Market in L.A. and Beverly Hills, CA
Understanding Home Price Reports: Looking Beyond the Median in Today's Real Estate Market in L.A. and Beverly Hills, CA | Christophe Choo at Coldwell Banker Global Luxury is Your Local Real Estate Expert
The National Association of Realtors (NAR) is set to release its latest Existing Home Sales Report, which may spark confusion and generate troubling headlines due to the information it contains on home prices. While other home price indices report repeat sales prices and indicate appreciation, NAR's use of the median sales price as a gauge of home values can present a different story. In order to truly understand the dynamics of the market, it is important to consider additional factors, including local trends from cities like Los Angeles and Beverly Hills, California.
The Median Sales Price and Its Limitations: To comprehend why relying solely on the median home price may not be ideal, it is essential to understand the insights provided by the Center for Real Estate Studies at Wichita State University. The median sale price represents the middle price of homes sold, indicating that half of the homes sold for a higher price and half for a lower price. However, it is not an effective measure for home price appreciation because it can be influenced by the composition of homes that have been sold.
The Influence of Composition on Median Prices: For instance, if there has been a recent surge in the sale of lower-priced homes, the median sale price would decline. This occurs even if the value of each individual home is rising. In cities like Los Angeles and Beverly Hills, the real estate market may exhibit variations in terms of the types of homes being sold, which can impact the median price. Therefore, solely relying on this figure might not accurately reflect the true appreciation in home values.
The Role of Mortgage Rates and Affordability: Homebuyers typically base their purchase decisions on the affordability of monthly mortgage payments rather than the overall price of the house. When mortgage rates rise, buyers may need to opt for less expensive homes to keep their monthly expenses manageable. This trend is leading to an increase in the number of "less-expensive" houses being sold, resulting in a decline in the median price. It is important to note that this does not necessarily indicate a decrease in the value of individual homes.
Recognizing the Limitations: Even NAR, an organization that reports on median prices, acknowledges the limitations of this type of data. They explain that changes in the composition of sales can distort median price data, reinforcing the need to consider alternative measures for a more accurate understanding of home price movements.
Understanding Median Value: To provide further clarity, let's consider a simple explanation of median value. Imagine having three coins in your pocket: one nickel and two dimes. If you line them up in ascending value, the median value (the middle coin) is ten 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 unchanged. Similarly, the real estate market functions in a similar way, with median prices influenced by the composition of sales rather than the intrinsic value of individual homes.
Bottom Line: While the median value reported in tomorrow's release may suggest a different story, it is crucial to recognize that actual home values are increasing in most markets. To gain a more comprehensive understanding of home price movements, it is advisable to look beyond the median and consider additional factors such as local trends. For a deeper analysis and insights tailored to your specific market, it is recommended to connect with a real estate professional who can provide a more accurate assessment.