What You Don't Know About Home Prices Might Hurt You

Home prices are gaining traction as topics in both the mainstream media and social media, but there are three common misconceptions about the change in home prices that are unanimously reported as unquestionably true.

Imagine you are preparing to make one of the most significant financial decisions of your life (buying or selling a home), and the commonly reported information leads you to make a poor decision. In fact, what if the reported information was based upon accurate data, but the interpretation of the information was ignorantly wrong?

I can tell you the confusion surrounding housing market changes is abundant these days. Let's review the top 3 misconceptions about home prices and how you should interpret what you are hearing or reading whenever the pretty faces in the media tell you what they believe about the housing market.

Expect A Jagged Price Line

If you've been paying attention, home prices are falling. Some viewers on our YouTube Channel have stated they expect home prices to fall 50%, yet most expect something more in the range of 5% to 20%. This leads us to my first point.

In the graph above, the blue line plots the median new home price, the yellow line plots the median existing-home price, and the red line plots the overall median home price. The yellow line shows that the median existing-home price had been falling in Tallahassee. That's enough information for most news agencies and amateurs on YouTube to announce as news. But isn't it worth mentioning that we've seen the same thing happen every year since 2004?

The median home price does not move in a smooth, straight line. Instead, it moves in a jagged line where we observe it rising and falling at different times each year. When we look at the median home price, it is a jagged line with both increases and decreases throughout the year. In 83% of the past 100 years, US home prices have increased for the year, though each year had counter-trends recorded too. The overall trend for this year is up; I believe it is premature to announce a decline in home prices until we see a year-over-year median price decline (the median home price in Tallahassee is still up more than 10% over last September).

A HUGE Point Nobody Ever Mentions

Now that you understand that prices do not move in a straight line, we can address a point that is never mentioned in the media. When mortgage interest rates rise and fall, it has little impact on demand. But when mortgage interest rates make a significant and sudden move, there is an immediate impact felt in the housing market.

If rates fall significantly, we see a feeding frenzy among buyers. Everybody wants to get some of that "cheap money," before it is gone. This was the case from mid-2020 through 2021. When rates rise significantly, like we are seeing today, it causes sticker shock for buyers currently in the market to buy a home. Here's how that looks:

Say a buyer went to a mortgage lender in December and qualified at a rate of 3.2% for a home loan with a payment of $2,000 monthly. Perhaps that buyer decided to wait until after May to buy a home (a common decision among families with school-aged children). In June, that same buyer was now offered a 6.1% mortgage interest rate. The impact (shock) of these different rates are:

• The buyer could afford a $490,000 home in December. Today, that home costs $540,000.
• Today, the buyer qualifies to buy a $330,000 home (which was worth $295,000 in December).
• The buyer's $2,000 monthly payment has dropped 40% in buying power since December.

Are you surprised that many buyers are in shock and have left the market? That is a very real scenario.

So, buyers today are spending less money due to mortgage interest rates soaring higher. Is it any wonder that the median home price is falling? Buyers have less money to spend. Non-discretionary buyers do not have the luxury of "doing nothing." I get comments all the time on our YouTube Channel where people say that people who buy today are stupid. When I see these comments, I wonder if they come from people who live in their parent's basement!

Some people have to move. Job changes, life changes, devastation (Central Florida). Unless you are willing to be homeless, you have to choose between buying or renting when you need a new place to stay. Both rents and home prices are soaring, so neither is a good option. But some people have to move, and I recommend they make an informed decision.

When you hear the phrase "median home price" or "average home price," referencing how the market is changing, are you thinking about home values? In other words, if a news report says average home prices are rising, do you think home sellers are getting more money? Or are you thinking that buyers are spending more money?

In the graph above, the blue line plots the median new home value, the yellow line plots the median existing home value, and the red line plots the overall median home value. What's the first thing that pops into your head when you see this? Here are a few options:

• In 2011, the cost to bring new homes to the market separated greatly from the existing homes market.
• The median existing-home value in Tallahassee has shot up more than 25% from its pre-pandemic level.
• The median home value fluctuates throughout the year. There has never been a year (since 2004) where the median home value did not fall or rise at some point.

The first point suggests the reason that the housing market is in such bad shape. Builders' costs have been so much higher than market value that they have been building cautiously. I've seen reports that estimate the US is short more than 3M homes right now. Rents and value are soaring, confirming the limited supply of shelter in the US.

The second point is widely known (albeit for US home values). Everybody knows that values have risen at unsustainable rates for the past two-plus years, so everybody's conclusion is that home values must fall. If you notice the yellow line at the far right in the graph, we've just seen two straight months where the median home value has risen. Do I think this proves that the market is recovering and moving to higher ground? No! It takes more than two months of changes in the median value to form a trend.

Anybody who has claimed that US home values are falling is premature. In some local markets, it is true. Those that have more supply than demand (ie, Las Vegas) are going to find falling home values. But for Tallahassee and the overall US housing market, there are not enough months of decline to demonstrate that home values are falling.

What You Don't Know About Home Prices Might Hurt You

The third misconception I'm addressing is that you cannot measure appreciation accurately by just following home prices.

Home prices represent buyers' spending, while home values represent what sellers get. If these numbers were always in parallel, the size of the average home would never change. For example, if the average home price drops 5%, most people think the average home value has dropped 5%. If this were always true, the average home size would be the same. Look below, and you'll see that is not the case.

In the graph above, the blue line plots the median new home size, the yellow line plots the median existing-home size, and the red line plots the overall median home size. The yellow line shows that the median existing-home size is falling in Tallahassee. So why is this so important?

Well, if home prices are dropping and home sizes are dropping, it means that home values are moving at a different rate than home prices. Perhaps they are falling? Or maybe rising. But they cannot be falling as fast as prices.

The most important takeaway from this graph (beyond the fact that the median home size is constantly changing) is that builders are creating larger homes than the market needs. New construction home prices are very high when compared to existing home prices, so builders should be building smaller homes.

In Tallahassee, I'd like to see the bulk of new construction focus on 800 to 1,500 square foot homes rather than the 2,000+ size homes we're seeing today. Much of this has to do with planning. When today's homes were in the development stage, mortgage interest rates were at an all-time low, so buyers were purchasing larger homes. But as rates have risen, home affordability has declined, thus smaller homes are all buyers can afford.

Builders have a very tough time meeting the needs of the market. If you saw my video about NIMBYism (below), you know why builders require so many years to bring homes to the market. We all need to do our part and tell our politicians they need to un-meddle the development process so that builders can bring affordable homes to the market.

3 Misconceptions About Home Prices

I hope I have helped you be better informed about the housing market with the three misconceptions about home prices:

• Home prices do not move in a straight line, so we must observe trends over time.
• Significant rate moves in the mortgage markets cause a feeding frenzy or sticker shock. Both are overcome with time.
• You cannot measure appreciation accurately by just following home prices. Home prices represent buyers' spending, while home values represent what sellers get.

Remember these common misconceptions about home prices the next time your local newspaper or YouTuber tells you something about what's going on in housing. Likely, they do not know what they're talking about.