When the media talks about rising home prices, it’s important to note which data they reference, as the median home price is the wrong metric to look at.
The median home price simply measures the middle-priced home that sold in a given timeframe, meaning that half the homes sold above that number and half below that number.
For example, the median home price for Existing Home Sales in September was reported at $311,800, up almost 15% year over year. But this doesn’t mean homes are not affordable – and it doesn’t mean home prices are rising at this level. It simply means the middle-priced home that sold was $311,800, with half the homes selling below and half above that price.
In September, inventory remained tightest among lower-priced homes, which is why not as many were sold. As a result, a greater number of higher-priced homes sold and the median home price moved higher.
In fact, there could be times when home prices could be flat or even falling and the median home price could move up simply by having more purchases at the upper end of the price scale than on the lower end.
Said another way: If there were no homes available for sale under $300,000 and all the purchases were above this amount, the median home price would move up – but this doesn’t mean home prices themselves are going up. It just means more of the purchase mix fell on the higher side.
The real metric to look at is appreciation, which is currently growing at a pace of 5.5% to 6% year over year.
Another important note about media and metrics has to do with income. Often the media looks at median income based on hourly earnings, which is also the wrong metric because what people make per hour matters less than what they take home. Consider, for example, a situation where someone’s hourly pay goes up, but that person works less hours and earns less overall.
The correct figure to look at is weekly earnings, which gives us a better understanding of what an individual is taking home in pay. That number currently is up 5.7% year over year.
Note that home appreciation figures and weekly earnings are in line with each other, but there’s something else to keep in mind when comparing the two. People don’t spend all of their income on their mortgage payment, so income does not actually have to keep pace with appreciation.
Let me know if you have any questions about this or how a specific market is performing. I am happy to share that with you.