Housing News

Be Careful with Median Home Prices

The public shouldn’t be too reliant on this measurement of home values.

The median home prices (MHP) are provided by the U.S. Census Bureau from a sample of houses with residential building permits. Those who follow the news on home values usually encounter data regarding the midpoint of home prices that have become a barometer of the media in their analysis. It is useful to some extent that some analysts have found it correlated with other housing determinants. According to Jim Welsh of Welsh Money Management, “Maintaining a stable relationship between median incomes and median home prices is essential. Between 1965 and 2000, median home prices and median income held fairly steady, averaging about 3 to 1. This meant home prices rose based on an increase in income. For instance, if median income was $30,000 in 1965, the median home price is $90,000. As median income grew from $30,000 to $40,000, median home prices rose to $120,000. This meant home prices were supported by a stable relationship between home prices and income, which enhanced the home owner’s ability to make his monthly mortgage payment on time.”

But do not be misled into the influence that MHPs have to the real estate market. There are a lot of limitations that this measurement possesses. First, its inclusion of housing types is limited to only single family and some multifamily units that are sold to a buyer. Owner and contractor-built houses are not counted where they could exert a greater influence in home prices. When more multifamily units are selling, expect the MHP to rise even when single family homes are beginning to lose their values because the former’s data can pull the distribution of prices towards higher prices.

Second, MHPs only count units that have been sold. They discount the large inventory that still have no buyers and are currently suffering from very low selling prices. Also, any MHP is subject to a large margin of error.

Third, the considered dates when determining MHPs can affect the result. Thus, we read different midpoint prices from various sources. Some cheat their way by including other dates that can raise values in order to create a phony healthy property market.

Fourth, the MHP can’t determine the range where it belongs to. A $200,000 MHP may be in the range between $150,000 and $250,000 or between $50,000 and $350,000. Again, it’s just the value in between the upper and lower half of the entire sample prices.

Fifth, the MHP fails to reflect the type of the home it is representing. A $500,000 MHP may be a 3BR house in one state while the same MHP may be a 1BR unit in a metropolitan area. It doesn’t even say if the house is still in good condition or it already needs major repairs.

It is important therefore that MHPs remain as data with very minimal indication of true housing values and trends.

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