What IS median house price?

The National Association of Realtors August report on existing home sales showed median home prices rising only in the South quadrant, yet the gain was large enough to outweigh declines in the West, Midwest and, especially, Northeast quadrants. In fact, the South quadrant helped bring the national figure to a positive 0.9 percent. Had the national number been negative - as indeed it may be in coming months, it would have been the first year-to-year decline in the median sales price since 1993. Year-to-year declines in the median home price are fairly rare, with only five months in the past 40 years seeing an actual price drop. Moreover, only once has the median price fallen on a year-to-year basis for more than one month, which was back in 1990.

So are we on the verge of a historic price decline? Possibly so, but further explanation is in order.

There is a great deal of misunderstanding about what the median home price actually is. Statisticians talk about three types of averages: The mean, the mode and the median.

The arithmetic mean is that number most people call the average. It is obtained by adding the numbers in a list and dividing by how many numbers were added. In a neighborhood, for example, you might add up the prices of 11 homes priced between $285,000 and $420,000 and divide the total by 11 to arrive at an average price of $340,000.

The mode is the number in a list of numbers that occurs most frequently. Again, using the same neighborhood as an example, homes between $285,000 and $420,000, and there are three homes priced at $285,000. The mode is the price that occurs most frequently in the list. In this example, that number is $285,000.

The median home price in the same neighborhood is the sales price that marks the middle of the price range. In our example neighborhood, it is $310,000. Exactly half the homes are above this price, and half the homes are below this price.

Analysts choose one of these three ways to summarize the data depending on what they want to illustrate. It is not always clear which method most accurately reflects the data.

The median is the number NAR reports each month, and it is the number point at which half the homes sold are above and half are below. The median price is not the average, or arithmetic mean, nor does it indicate the value of the "typical" home. The median price is merely the middle value of homes sold and reflects the value of home sales closed each month. It does not reflect the value of homes on the market or homes not for sale.

That said, why is the median price likely to fall in future months? And why is this likely to be one of the few times in history where the year-to-year change in the median home price drops for more than one month at a time?

The answer is pretty simple. We have just completed one of the strongest housing booms in history, with sales surging to levels unheard of a decade ago and the median price rising nearly 44 percent over the past five years. When coupled with the recent increase in short-term interest rates, housing affordability has fallen to its lowest level in nearly 20 years. This means fewer households can afford to buy a home today, and those who can afford to buy will now qualify for a less expensive home. The decline in housing affordability means a larger proportion of existing homes sold each month are lower priced homes. This change in the mix of homes sold is responsible for most of the slide in the median sales price.

Moreover, home sales have slowed the most in states that saw the largest price gains, such as Arizona, Florida, California, Virginia and Nevada. By contrast, sales are rising in states where prices have risen only modestly, such as Texas, North Carolina and Georgia. These three states, which account for about one of every seven homes sold nationwide, boast housing prices well below the national median.

Another home price measure produced by the Office of Federal Housing Enterprise Oversight (due Sept. 5), which measures price changes of the same home, will not likely post a decline this year. Clearly, a decline in the median home price does not necessarily mean that housing prices are falling.

Bottom line - make sure you understand the facts behind the headlines. Things just might not be as bad as the headline would suggest.


Example Neighborhood
House 1: $285,000
House 2: $285,000
House 3: $285,000
House 4: $305,000
House 5: $310,000
House 6: $310,000
House 7: $350,000
House 8: $380,000
House 9: $400,000
House 10: $410,000
House 11: $420,000

Total value: $3,740,000
Mean: $340,000 ($3,740,000 divided by 11)
Mode: $285,000 (most frequent value)
Median: $310,000 (House #6)