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Average vs. Median: I’m lost

Why the Median is a Better Metric for Real Estate Analysis

In real estate, pricing data is crucial for buyers, sellers, investors, and analysts to make informed decisions. Traditionally, many market analyses focus on averages (means) to describe property prices. However, in diverse markets like real estate, the median price is often a more reliable and insightful metric. Here’s why the median tends to provide a clearer, more accurate picture of market conditions.

While averages can be useful in certain scenarios, the median stands out as a superior metric in real estate, providing a clearer, more reliable reflection of the market. As real estate markets continue to evolve and diversify, relying on the median will only become more crucial in accurately understanding and navigating these complex environments.

Let’s consider a few examples.

1. The Impact of Outliers: Average vs. Median

Consider a small neighborhood with the following sale prices for five homes:

$300,000

$320,000

$330,000

$340,000

$1,200,000

In this example, the average price is calculated by adding all prices and dividing by the total number. The average price here is $498,000.

Average = (300,000 + 320,000 + 330,000 + 340,000 + 1,200,000)/5 = 498,000

The median price is the middle value when the prices are ordered from lowest to highest. In this case, the median price is $330,000

The single luxury property priced at $1,200,000 skews the average, making the market appear more expensive than it actually is for typical buyers and sellers. The median, however, gives a clearer picture of what a typical home costs in this neighborhood by focusing on the middle point.

2. Market Segmentation Example

Now, imagine two neighborhoods.

Neighborhood A has a variety of properties, including luxury homes, mid-range houses, and smaller starter homes. The sale prices are:

$200,000

$220,000

$250,000

$1,000,000

$1,500,000

Neighborhood B is more uniform, with mid-range homes priced as follows:

$240,000

$245,000

$250,000

$255,000

$260,000

For each neighborhood:

Neighborhood A:

Average: (200,000 + 220,000 + 250,000 + 1,000,000 + 1,500,000) / 5 = 634,000

Median: 250,000

Neighborhood B:

Average: (240,000 + 245,000 + 250,000 + 255,000 + 260,000) / 5 = 250,000

Median: 250,000

In Neighborhood A, the average is pulled up to $634,000 due to the high-end properties. However, the median remains at $250,000, reflecting the price point around which most homes in the neighborhood are clustered.

For Neighborhood B, the average and median are both $250,000, accurately reflecting the market. This example shows that in diverse markets, the median more reliably indicates the “typical” property price, unaffected by high-end or low-end extremes.

3. Market Trends and Volatility: Monthly Changes in Average vs. Median

In the next example, imagine a market analyst who is tracking monthly home prices in a neighborhood. Here’s a snapshot of sales prices over two months:

Month 1 Prices:

$300,000

$310,000

$320,000

$325,000

$330,000

Month 2 Prices:

$305,000

$310,000

$315,000

$320,000

$1,500,000

For each month:

Month 1:

Average: (300,000 + 310,000 + 320,000 + 325,000 + 330,000) / 5 = 317,000

Median: 320,000

Month 2:

Average: (305,000 + 310,000 + 315,000 + 320,000 + 1,500,000) / 5 = 550,000

Median: 315,000

In this example, the average jumps from $317,000 in Month 1 to $550,000 in Month 2 due to the sale of a single luxury property. This change could create the impression that property values in the area have significantly increased. However, the median remains relatively stable, moving from $320,000 to $315,000, reflecting that typical home prices have not dramatically changed.

The median’s stability makes it a better measure for tracking market trends over time, avoiding misleading volatility from occasional high-value or low-value sales.

4. Accessibility for Buyers and Sellers: Average vs. Median Expectations

Finally, let’s consider a potential buyer researching a neighborhood. Here are the sale prices of recent homes:

$350,000

$375,000

$400,000

$425,000

$1,200,000

The average price here would be $550,000, while the median price is $400,000.

If the buyer sees an average price of $550,000, they might assume they need to budget much higher than necessary to buy in this area. The median, however, indicates a typical home price of $400,000, which is more accessible and reflective of what most homes in the neighborhood actually cost. Using the median helps set more realistic expectations, particularly for buyers and sellers, by highlighting the typical transaction price and avoiding skewed perspectives from extreme property values.

The Median Minimizes the Impact of Outliers

Real estate markets consist of a vast range of property types, from entry-level homes to luxury estates. A few extraordinarily high-priced or low-priced properties can significantly skew the average, making it less representative of the typical property price. If a few multimillion-dollar homes sell in a neighborhood where most homes are around $300,000, the average price will be pulled upwards, creating a misleading perception of the market.

The median, on the other hand, is the middle value in a sorted list of prices. It identifies the point where half of the homes are priced below and half are priced above, regardless of extreme highs or lows. By focusing on the middle ground, the median reflects the price of a “typical” home, avoiding the distortions caused by a handful of high-end or low-end sales. This quality makes the median particularly effective in diverse real estate markets.

Better Representation of Market Conditions

In most real estate markets, property prices are not uniformly distributed. Often, they follow a skewed distribution where there are more mid-range homes and fewer high-end or entry-level properties. The median accounts for this imbalance and provides a central price point that better reflects the majority of transactions.

For instance, if a market has a few luxury homes but predominantly mid-range properties, the median will fall within that mid-range segment, offering a realistic view of what most buyers or sellers might encounter. In contrast, the average could be pulled toward the luxury segment, giving a false impression of higher market prices. By relying on the median, market analysts can better communicate real market conditions without distortions.

Consistency Across Different Market Segments

Real estate markets often contain multiple segments—such as single-family homes, condos, and luxury properties—each with its own pricing dynamics. The median is more adaptable across these segments because it is a measure of central tendency that remains consistent regardless of the number of luxury or budget properties in the mix.

Imagine a real estate market report comparing two neighborhoods: one with a broad range of home prices and another with more uniform pricing. The median can provide a stable benchmark that allows for accurate comparisons between these neighborhoods, as it remains unaffected by the uneven distribution of high-end or low-end properties.

Reduced Volatility in Market Analysis

The median offers stability over time, making it a reliable metric for tracking changes in the market. The average can fluctuate widely month-to-month if just a few high-value properties sell in a given period, giving the impression of volatility. This effect can lead to confusion for stakeholders trying to interpret market trends.

Since the median is less sensitive to extreme changes at the high or low ends of the market, it reflects the overall trend more consistently. For investors or potential buyers watching the market, the median provides a clear picture of how prices are trending, rather than reacting to a few exceptional sales that might cause spikes or dips in the average.

Greater Accessibility for Buyers and Sellers

For buyers and sellers, understanding real estate pricing is essential, but average prices can sometimes give a skewed or confusing view of the market. The median, with its focus on the “middle” price, aligns more closely with the types of properties most buyers and sellers deal with. This metric provides a more accessible entry point into understanding the market, as it aligns better with what the typical transaction looks like.

For example, in a neighborhood where the median price is $500,000, potential buyers can reasonably expect to find a property in that range. If the average were instead reported as $750,000 due to a few luxury home sales, it might deter or mislead buyers and sellers about their actual market position.

Conclusion

The median is a powerful tool in real estate analysis. By focusing on the middle of the price range, it avoids the distortions caused by extreme values, represents typical market conditions, and provides consistency across diverse market segments. Whether you’re a buyer, seller, or analyst, the median offers a stable, realistic, and accessible measure of property values, making it an invaluable metric for making sound real estate decisions.