Median vs. Average
The median of a set of numbers is that number where half the numbers are lower and half the numbers are higher. In the case of real estate, that means that the median is the price where half the homes sold in any given area that month were cheaper, and half were more expensive than the median.
The average of a set of numbers is the total of those numbers divided by the number of items in that set. The median and the average might be close, but they could also significantly different. It all depends on the numbers.
Here's an example. Take a look at these 11 fictional home prices:
- $1 million
- $3 million
The median price of these 11 houses is $105,000. That's arrived at because five houses were lower priced and five were higher priced.
The average price of these 11 houses is $498,000. That's what you get if you add up all those prices and divide by 11.
What a difference. When you are looking at recently sold prices of houses, make sure you know whether the numbers are averages or medians. Both numbers provide good information, but they have different implications. If the average price in a particular area is higher than the median for the same time period, that tells you that the area contains significantly higher-priced houses even though in that particular time frame, sales were strong in the lower range.
Best Number to Use for Real Estate
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 significantly skewed by sales that are extremely high or extremely low.3
If you were looking at an area whose prices were reflected in the example above and you considered the average price, $498,000, 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 sales, the average is $164,000, 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, $105,000, 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 at that location in that time frame.