Median vs. Average in Residential Real Estate – Let’s Clear Up the Confusion!
Okay, maybe I’m the only one who has been confused about median vs. average. But
I’m a strong believer in learning and seeking out knowledge when I really don’t know the answer to something. So, loving to share my new-found knowledge with others, here is what median vs. average means in the real estate world (for those of you, like me, who really didn’t know – it’s okay, admit it!)
One of the most important issues home shoppers face is knowing how much you can afford and how that balances with what you want in a home and finding a great location. You’ll often read about and hear agents mention the terms “average prices” and median prices" when prices are being compared in various areas, and those terms can be confusing. Well, before we dive into these terms as they relate to real estate, let’s review some 5th grade math!
Median – the middle number in a sorted, ascending or descending list of numbers.
Average – a number that is calculated by adding numbers together and then dividing the total by the number of quantities.
In real estate, half of the homes in an area sell above the median price and half of the homes sell below the median price. That means the median is the price where half of the homes sold in any given area that month were cheaper, and half were more expensive. As for average in real estate, the average adds up all of the sales prices and divides them by the total number of sales.
Note that when looking at the median and average prices, the median and the average might be close, but they could also be significantly different depending on the numbers.
So, which is the better number to use when pricing homes? According to The Balance, “The median price in a particular neighborhood is generally regarded as the more useful of these two ways of looking at prices. That's because an average price can be skewed by sales that are extremely high or extremely low.”
For example, here are 11 hypothetical home prices in Charlotte:
The median price of the 11 homes is $125,000 (five homes were lower priced and five homes were higher priced). The average price is $371,818 (all 11 prices added up and divided by 11). Quite a difference between the median price and the average price, right? That’s because the last two homes were much more expensive than the other homes. Unusually expensive homes in an area can skew the average price more than the median price, so buyers may prefer to look at the median sales prices when considering a neighborhood.
If you were seeking out an area where prices were reflected in the example above, and you focused on the average price of $371,818, you might decide it is out of your price range and look elsewhere. But that number is distorted, because while most of the houses sold in the low $100,000s, the two at the high end drastically changed the average. If you remove those two million dollar homes, the average is $176,667, which is still higher than the median but much closer to it than the other number. That's the effect that extremely expensive (or extremely low priced) house sales have on average prices for an area. On the other hand, if you look at the median price, $125,000, you might think that area was very affordable, and it's a much more accurate reflection of the prices of most of the houses sold in that location in that timeframe.
So, the takeaway is this, when you are looking at recently sold prices of houses, make sure you know whether the numbers are medians or averages. Both numbers provide good information, but they have different significations. A knowledgeable real estate agent (like me, now) will educate and help lead you to the right home.