Some interesting changes are coming about in home price indices. Both the Florida Association of Realtors and the National Association of Realtors have stated they are working on new price indices that will track the sales prices of individual homes over time. Most state associations currently track median prices for their respective markets in a particular month or quarter.
Why are they doing this? The thinking is that median prices are not always a great way to gain insight into pricing trends in any given market because the variety of housing types can alter the median price one way or the other.
For example, say a particular market’s sales have mostly been at the lower end of the price spectrum due to distressed sales and a higher number of first-time buyers than move-up buyers. The lack of sales at the luxury end will have the effect of pushing down the median price, when in fact there may be average increases in prices for starter homes.
Because the quality of housing stock continuously changes over time in any given market, the conclusions drawn from tracking median prices may not say a lot about an overall pricing trend. Median prices only reflect values of the properties that are sold at that particular time, which raises a lot of questions when examining the data.
For instance, are house prices really increasing in this market or is the median value higher this quarter because so many luxury homes sold?
The tracking of repeat sales or refinancings of the same property is not a new concept. In fact, the S&P Case-Shiller Home Price Indices and the Federal Housing Finance Agency’s Home Price Index have always done it this way.
Using repeat sales over median prices to track home prices may end up changing the national story on home prices in coming months. It’s important that agents be aware of what’s happening in order to explain it to buyers and sellers.
However, I still stick to the school of thought that believes the only price numbers that really matter to individual buyers and sellers are the neighborhood comps. These are the figures that will determine the fair market value of homes going for sale or being purchased. Every conversation about prices should start and end by looking at these closely, not the national numbers, state numbers or even city numbers.
Real estate is local – as in block by block. Those are the true price trends to watch.