Academic journal article ABA Banking Journal

Why the Median May Not Be the Message

Academic journal article ABA Banking Journal

Why the Median May Not Be the Message

Article excerpt

THE NATIONAL ASSOCIATION of Realtors August report on existing home sales showed median home prices rising in only the South quadrant, yet the gain was large enough to outweigh declines in the West, Midwest, and, especially, the Northeast quadrants and bring the national figure to a positive 0.9%. 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. In fact, only five months in the past 40 years have seen 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 some further explanation is in order. There is a great deal of misunderstanding as to what the median home price actually is. The NAR median home price is not the average, nor does it necessarily 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 home price likely to fall in future months, and why will it be one of the few times in history where the year-to-year change 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% over the past five years. …

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