What Does Median Price Mean?

Many people are confused between average and median price.  Here’s an example to help you understand the difference.

Let’s say you had seven properties in a neighborhood and they sold for the following amounts:

• $87,000

• $110,000

• $112,000

• $115,000

• $118, 000

• $120,000

• $122,000

The median price of these properties is $115,000. The mean or average price is $112,000, which is logically closer to splitting the difference between the high and low sales. Generally, the median price is considered a more reliable indicator of the state of the market than the mean price. Why? Because if more homes on the extreme high end or low end of the spectrum sell (as in this example), it can throw off the whole equation and provide a misleading figure. Therefore, using the median price is a better yardstick to measure your local market.

If median house prices in your area are rising, this can be a good indicator that your market is on the way up. If prices are rising, you can ride the appreciation of the properties. In this kind of market, you won’t have to buy houses as cheaply, depending on your exit strategy However, if they have been rising for several years and the rise in price is slowing, it can be a sign that your market defensive in your buying—that is, you would buy properties at a lower price and assume no market appreciation (or possibly anticipate falling prices in the short term). Also, keep in mind that many areas are seasonal, so housing prices may be higher in the spring and summer than in winter (or vice versa in ski resort areas, for example).

In addition, housing prices don’t reflect the amount of money sellers spend to renovate the property before the sale. In a seller’s market, homes will sell quickly regardless of their condition. In a buyer’s market, sellers may spend as much as 10 percent of the price of the home doing renovations before placing it on the market. Thus, for example, if the price of a house rose 5 percent in the last year, it’s really a net loss of 5 percent for that area. You need to look not only at numbers, but also at the houses for sale. Go to open houses and talk with real estate brokers in a particular area to get a reality check of what’s really going on.