Average Price? Median Price? What's the Difference? Lessons in Real Estate-ese, Part 3

 

 

what does median meanIn the language of real estate-ese, common expressions we hear over, over, and then over again are “median” price and “average" price. But what’s the difference? Is one more telling as a data source than the other? Yes. And no. Basically, we as buyers should understand both numbers, both for what they can tell us and for what they cannot.

Median and Average calculations look at the same data, but from different perspectives. Both represent the aggregate of all home values in a particular area, and attempt to produce a “mid-range” figure that straddles the least expensive and most expensive homes for sale. But beyond these commonalities, median and average diverge to become very different numbers.

To Illustrate, We Break Out an Old School Word Problem

 

Say 5 people in the same family get together for Superbowl Sunday. Their yearly income is as follows:

  • Mark           50,000
  • Dave          60,000
  • Carmen     55,000
  • Alan           70,000
  • Angie         75,000

If our high school math teacher arrived in our living room and demanded we find the average income of this family, we’d know exactly what to do: Add them all together; divide by 5, and find the number. So,$310,000 divided by 5=$62,000, the average income for this family

And this same family can show us its median income too. Here, we first have to put the numbers in order. We chose ascending for this example:

  • Mark            50,000
  • Carmen      55,000
  • Dave            60,000
  • Alan             70,000
  • Angie           75,000

Guess what? No more math needed. The median number is simply the middle value, in this case Dave’s, since his $60K falls right between the two lower and two higher values “Median” just means the "middle" value in a particular group of data.

So They Aren’t that Different?

In our example, the numbers are close enough, but let’s take it a step further. Say the long lost sister returns to the fold, showing up to watch the Superbowl with her family. She brings with her a lot of beer, pizza, and an income of $250K. Angie, who was enjoying being the star of it all, storms out in a jealous rage and takes her $75K with her. Now the family income looks like this:

  • Mark            50,000
  • Dave           60,000
  • Carmen      55,000
  • Alan             70,000
  • Long lost sister    250,000

The new family total is $485,000. If we divide that number by 5, the average income is $97,000. But does that number really represent Mark, with his $50K a year? Or even Long Lost Sister, with her $250K? $97,000 may be technically correct as the average-- but it is not representative of anyone in the group.

Is Median More Accurate?

To put it shortly: sometimes. Let’s check this same example:

  • Mark            50,000
  • Carmen       55,000
  • Dave            60,000
  • Alan             70,000
  • Long Lost Sis       250,000

Dave’s income is still the median, because he falls dead center between the lower numbers and the higher ones. And while his income is far from his long lost sister’s, it’s certainly closer to the rest of his siblings’, and thus perhaps more accurate for judging the entire family’s “worth.” Though you'll note, his figure is woefully under-representational of his wealthier sister's.

The Real Estate Connection

When we’re trying to decide if you can afford to live in area, median and average prices naturally come up. But is either one more useful?

Some experts say the median tells us better what the “mid-range” price actually is. As we see from the above example, extreme outlier figures (very cheap or very pricey houses) can skew an “average” severely.

On the other hand, when dealing with entire metro areas, other experts say the average can be more useful. ZipRealty’s Becky Gee, an agent who often works with first-time buyers in the Portland, OR metro, says

In the Portland metro, the median price is lower than the average price since the data tends to pull from the region and not just Portland. This can be confusing to people wishing to relocate as they believe it is less expensive to live here than it really is.”

Becky’s strongest advice is not to rely so much on metro level statistics in the first place, advice we’ve seen before in ZipCode blogs. She recommends studying sales prices “in the neighborhoods clients are looking at,” specifically. In the case when clients know where they want to live, Becky can pull comparative sales (known as “comps” in real estate-ese) in nearby areas so that clients can see what houses really “cost” and how much house they can afford in a particular neighborhood.

So now we’ve conquered the DOM, the median, and the average. Tune in next week for your final lessons in the lingo of buying a home as move toward the wrap up of our first-time buyers advice series.