Wednesday, November 22, 2017

When It Comes to Real Estate Statistics, We Should Think “Median” not “Average”



Excuse me for getting a little nerdy here, but it’s important to know the difference between “median” and “average” when studying the real estate market, and here’s why.

Let’s say an area has five home sales: one at $300,000, a second at $325,000, a third at $330,000, a fourth at $400,000 and a fifth at $1.2 million.  The average sale price would be $511,000, a huge increase over the previous year when all the sales were under $400,000. The median sale price would be $330,000, because half the sales were under that price and half were over.

Now let’s look at “Days on Market.” Let’s say those five homes took 1, 2, 5, 7, and 150 days to go under contract. The average days on market would have been 33, while the median would have been only 5 days. Which is more useful?

These two hypothetical scenarios are precisely what we’re seeing in the real estate market. Luxury homes are selling much more quickly than they have in years past,  inflating the average sales price, whereas the median sales price by definition discards both the lowest and highest data points, providing a more accurate picture of what’s happening in the market.

At right is a chart comparing 2017 average days on market to median days on market.   Homes that take a long time to sell -- particularly in the current market -- are almost invariably overpriced.  The amount of time these homes languish on the market artificially increases the average days on market. The median days on market is a much better reflection of the market.


Despite this, statisticians and market analysts keep reporting changes in the average sales price or the average days on market instead of giving us the more meaningful median statistics.



14 comments:

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  2. The median house price is the midway point of all the houses/units sold at market price (or sold amount) over a set period (monthly, yearly, quarterly, etc.). That is, if there were 101 houses sold during the month, the median house price would be the house price in the middle i.e., that has 50 house prices above it and 50 house prices below it.

    Regards,
    Ajay Kumar
    Real Estate Appraiser

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