Real Estate Statistics are everywhere - TV, radio, the news, ARMLS reports and CMAs, websites.. And they seem to use the terms Average, Mean, and Median at random.
Today we'll take a quick look at the differences between the terms, what each one is trying to tell you, and whether or not it even matters which one you use. I'm going to focus on their use in real estate statistics, such as "median sales price" and "average number of days on market", etc.
defining the terms
The Average of a set of numbers is the total (sum) of all the items' values added together, divided by the number of items. For example, if 3 homes sold for $100,000, $150,000, and $350,000, the Average would be $200,000, because the total (sum) is $600,000, and we would divide that by 3.
The Median of a set of numbers is that number where half of all the numbers are lower and half of all the numbers are higher - it's the very middle number. In the same example, if 3 homes sold for $100,000, $150,000, and $350,000, the Median would be $150,000; it's the middle number where half sold for less and half sold for more.
The Mean is just a synonym for Average; they "mean" the exact same thing.
Simple Chart Examples
Chart 1 below shows an over-simplified neighborhood, where 5 homes have sold recently. 4 of the 5 ranged from $100,000 to $175,000, but the 5th home was significantly more expensive at $850,000.
The Median Sold Price is the same as the middle sale: $150,000. But the Average Sold Price is closer to $300,000, due to that one high-priced home.
Why does this matter?
Suppose you had clients looking for an entry-level home in a nice neighborhood, and you told them prices in this neighborhood averaged about $300k - they would probably scratch this area off their list as too expensive, even though most of the homes are within their price range.
But what happens when you tell them the neighborhood's median price is $150k? You're probably showing them homes that afternoon!
Chart 2 shows the same concept, but with more homes selling in a more realistic pricing pattern:
Once again the more expensive homes at the top of the neighborhood are pulling the average up above the median. It's not as drastic as the first example, but it still makes a difference.
The median price is not impacted by the dollar amount of the expensive sales; it simply acknowledges these sales as part of the more expensive half. The average price includes the dollar amounts into its calculation, so it can be raised or lowered based on how many high-end sales, and how expensive those sales are.
The Average Price of $169,190 is only comparable to a few actual prices; most homes sold for either a lot less or a lot more than the average price. But the Median Price of $143,000 is similar to the majority of the homes' sold prices; only the few homes at the ends of the spectrum are significantly different from the median price.
I'll use Average in my charts from time to time, but I rely on Median as a more accurate measurement of what is really going on in a particular neighborhood / zip code / city, because it's based on the overall makeup of that particular area and cannot be influenced by one or two luxury sales.
- Chris Butterworth
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* All chart data represents single-family detached homes only. Information is believed accurate but not guaranteed.